Don't Get Caught Without Gap Insurance
By Teresa Ambord
If you’re like many people, you may feel like you pay a fortune for mandatory insurance you never use. But if you have a car loan, especially if you financed it with a small down payment, you should have gap insurance.
Before you scream, you should know exactly what gap insurance is. Gap insurance is valuable because cars depreciate rapidly, meanwhile, in an effort to sell more cars, finance companies are making longer and longer loans, some for periods up to seven years. While the car is losing value rapidly, the amount you owe has barely changed.
Consider this scenario: You purchase a $25,000, car and finance the entire amount. In just a couple of months, your car is valued at only $20,000, and your payments have barely made a dent in the principal. You are upside down on the loan, meaning you owe more than your car is worth. According to Edmunds.com, 40 percent of Americans with auto loans find themselves in this situation… upside-down.
What if your car is totaled? Since you have auto financing, you probably have comprehensive car insurance. So you may think your insurer will pay off the loan and replace your car. But you’d be wrong. Chances are, your insurer will only pay the fair market value your car, which at this point is around $20,000. But the finance company still wants it’s full amount, which is close to $25,000. If you also financed the tax and license, the amount you owe will be even higher. And, if at the time you bought your new car you still owed a balance on your former car and rolled that loan into the loan on the new car, you will be paying through the nose for a car you no longer have. All this while you are already dealing with the loss of your car, and any possible injuries that might’ve been caused in the accident. That’s where gap insurance comes in. It literally covers the gap. In the scenario above, your gap insurance will pay off your finance company the remaining $5,000, or whatever the balance is.
You might think such insurance would be quite expensive. But the fact is, it’s generally very low cost.
Note: Gap insurance is only available on financed cars, and in some cases may exclude cars that are totaled from natural disasters or cars that are stolen.
Who Needs Gap Insurance the Most?
Gap insurance is important for anyone financing a car loan. But if the car is going to be driven by a very young driver, a very old driver, or an inexperienced driver, the chances of the car being totaled early in the loan period are high.
The longer your loan, the more likely you are upside-down. Eighty-two percent of car loans are longer than four years, while 31 percent are longer than five years. And in at least one state, some loans are seven years.
If you are leasing your car, you need gap insurance even more. If your lease did not include gap insurance at the time you signed, you may still be able to purchase it. However, chances are, to qualify, you will need to be in compliance with the lease terms, and you probably must have collision and comprehensive auto coverage.
Here’s one caveat: Sometimes your regular auto insurance will include gap insurance. The last thing you want is to duplicate coverage, so before you buy gap insurance, call your auto insurer or check your policy.
