As a responsible driver, you know that having auto insurance is a must, but what happens if your policy payouts fall short of your needs? Gap insurance can come to the rescue by guaranteeing that you don't have to pay out of pocket if your financed vehicle gets totaled. Here's how it works.
What Is Gap Insurance?
Guaranteed auto protection, referred to as gap insurance, helps motorists who owe money on auto loans when their automobiles fall prey to theft or severe damage. It makes up the difference between the amount that you still owe and what your existing car insurance policy will pay for the loss that you incur.
Gap products vary. Some add-ons insure the party that originated the lease or made the loan. Others protect you as the motorist. It's important to understand the difference and choose the right coverage for your situation.
Who Needs Gap Insurance?
Not every driver who takes out a loan on their car needs to add gap coverage to their existing car insurance. If your loan amount is small and you've been paying it off responsibly, then having the extra insurance might not be worth what it adds to your premiums. Gap coverage also fails to cover penalties that your lender assesses because you missed payments or forgot to pay on time.
What if you owe more than your vehicle is worth, also known as being in an upside-down loan? This add-on could help you resolve your obligations without exposing yourself to serious financial burdens.
Gap coverage might benefit those who:
- Trade in their upside-down vehicles and roll the remaining value that they owe into their new loans, increasing their total balance.
- Purchase cars that lack resale value, such as limited-production models that depreciate rapidly.
- Finance vehicles by making minimum down payments and therefore end up in upside-down territory the instant they finalize their purchases.
- Obtain loans with lengthy repayment terms that take longer to break even.
- Rapidly accumulate mileage or use their vehicles for work that drives their value down.
Where Do I Buy Gap Insurance?
Some dealers offer lending terms known as gap waivers that excuse you from the rest of your loan in the event of a total loss. Although dealerships and their financing departments may refer to this as gap coverage, the only entities that can legally provide gap add-ons are licensed auto insurance companies.
Motorists should generally try to avoid dealer-offered gap coverage. These products can be expensive, and they may not provide complete financial protection in the event of an incident. Your financing eligibility also shouldn't rest on your decision to purchase or forego a gap waiver or policy plan unless your finance charges and annual percentage rate include the extra cost.
The simplest way to purchase gap car insurance is to talk to your current insurer when you're in search of a new vehicle. You may also be able to obtain gap coverage from your auto insurance company after you make a new vehicle purchase, but it's easier to investigate your options in advance.
Is Gap Coverage Right for You?
Car insurance products aren't perfect, but adding gap coverage might help you minimize your financial burdens after totaling your vehicle. Before purchasing your gap insurance, always be sure that you understand the terms involved. You should find out whether you're actually getting insurance or just a dealer waiver, and you should choose your policy details wisely.