What is Gap Insurance, also known as the Guaranteed Asset Protection is a form of auto insurance that implies covering the gap between the current value of your car and the part you still owe on it were it to be wrecked or stolen. Seems easy, doesn t it? However, it is really a fiscal cushion, that most individuals do not consider, until it is too late.
Suppose you purchased a brand new car at a cost of $30000 and you financed all the payments. In one year, the market value of your car will be reduced to 22,000 dollars only and you are still left with the loan which has a value of 27,000 dollars. In an accident, suppose your standard auto insurance only pays you the market value of the car e.g. 22,000 then you will still have 5,000 left to cough money out of your pocket. There is where gap insurance comes in.
Why Does The Value of Your Car depreciate so Quickly?
Depreciation is the primary purpose of gap insurance to come into existent. New cars depreciate even as you take them out of the lot literally some by up to 20 percent in the one year. After three years, most cars depreciate to a value of about 40 percent compared with their initial ones.
Such loss of value can be a financial nightmare, particularly, when you:
- Borrowed a long term loan ( 60+ months)
- Ventured a small or no down payment
- They have rolled over old debt into your new car loan
And, should any one of this apply to you, gap insurance is no longer an optional bonus to have, but may indeed save you thousands.
Actual Reality of Gap Insurance
When your car is rendered a total write-off, the normal auto insurance company ascertains the value of your car at the moment of the accident. That is referred to as the actual cash value (ACV). They then cut you a check that carries that amount (including your deductible). This sounds fair, does it not? Now here is the twist.
Let’s say:
- Loan amount due = 25000.
- Policy limit = 20, 000
- Deductible – 500
You will still be short your $5,500 even when the claim has been paid. And that is the connection gap. This gap would be covered by gap insurance (with gap insurance not covering your deductible which it is important to check).
And then after all:
- Standard insurance = value of car covered
- Gap insurance = pays off the unpaid loan amount
Who Really Need Gap Insurance.
Gap insurance is not necessary to every person. You are less likely to be upside down on your loan (owing more than the car is worth), if you paid cash or a large down payment on your car. There are however certain scenarios where gap insurance is extremely advisable:
- Lease of automobile: In several cases of lease, the lease agreement necessitates gap insurance.
- Little or no down payment financing: You are going to be underwater on your loan at first.
- Long loan payoffs: Paying off the loan out over 60 months more than doubles your chance of a gap.
- Cars depreciating high: There is also an easy depreciating car model in addition to, fast.
Any of these descriptions sound familiar to your case? The gap insurance is worth your attention. It is just a little expense now that might save you a huge invoice in the future.
How to purchase a gap insurance?
There are two things you usually can do:
- Using the lender or dealership
- Via the provider of your car insurance
Making purchases through a dealer may be convenient particularly when you are factoring it in to your loan. However, a price varies–often it is hundreds of dollars. However on the other hand, gap coverage is available at a significantly low monthly insurance premium with most car insurance companies charging anywhere between 20-40 dollars a year.
The rapid comparison can be made as follows:
- Dealer gap insurance: a single payment, higher in cost
- Gap insurance by Insurance providers: supplement to your insurance policy, less expensive
Compare the two options as well as read what is written in the fine print. Others are subject to exclusions or limitation on amounts that they will pay.
Is it worth taking out a Gap Insurance? Advantages and disadvantages
It is time to take it apart.
Pros:
- Insures against the amount of automobile value less the loan value
- Gives security in case you are leasing or financing it
- Saves you the trouble of having to pay out of pocket when you are in a loss scenario
Cons:
- It is only helpful under certain circumstances (generally at the inception of the loan)
- Depending on the local of purchase, prices may be quite different.
- Does not include mechanic problems, repairs or wear and tear
Put simply, gap insurance will be a form of insurance net. You may not requires it, but when you require it you will appreciate its usefulness.
What is Gap Insurance Cost?
Gap insurance depends on a variety of factors to cost, including:
- The insurance company
- Your car value
- Your leasing or borrowing conditions
But generally:
- An insurance company: 20 40 dollars a year
- A dealership/lender: a one-time fee is between $300 and up to $800 (able to roll into loan)
The low cost alternative? In most cases your insurer. Simply call them and inquire whether they have it- you may purchase it alongside as an addition to your existing policy with just a slight increment on your premium.
When do you need to cancel gap insurance?
One thing most people fail to ask is how does one know when gap insurance becomes useless?
The solution: when the value of your car in the market is more than the amount you owe in a loan. By then, there is no gap that should be closed. It is safe to cancel the coverage and save some of the money.
Warning it is time to dump gap insurance:
- It is your own car more than 3 years old now
- Your monthly payments were big, and you have caught up with depreciation
- You did a review of the current value of the car and it is higher than the loan due amount
It is typical of most insurers to allow you to drop it at any time so monitor your loan to value ratio.
The typical myths of gap insurance
We want to remove some misconceptions:
- I am under full coverage so I do not need gap insurance.
Full coverage covers your car, and it will only pay what the car is worth and not the loan. Big difference.
- I have a new car, so I have got it covered.
New cars lose the value in the shortest period of time. Even more than older vehicles, as a matter of fact, gap insurance is needed on a new car.
- It is a rip-off.
No, not if you find yourself in a high-risk scenario (low down payment, long loan, or lease), then this is a financial tool that could save you several thousands.
Thoughts in the End: Is Gap Insurance a Wise Decision?
Gap insurance Then, what is gap insurance? It is not a sophisticated accessory that can buy you the security against a financial blow that may not be quite uncommon. In case you paid small sum down and the actual price of your car is lower than your loan debt in case the worst situation has happened, then probably gap insurance was your guardian angel.
- A cheap price to have rest of mind
- Smart credentials on highly depreciated cars and leases
- Not needed by all-and priceless to a few
Bottom line: Be in the know of what your car is worth. Be aware of your balance on the loan. And in case there is a gap between the two, consider filling it- before life surprises you.
