Gap Insurance: When You Owe More than You Own
There’s nothing like buying a new car. That new car smell. The joy of putting those first miles on the odometer. The huge decrease in your car’s value the minute you drive it off the dealer’s lot! A new car can depreciate up to 30% during the first year. Ouch!
So what happens if you owe $20,000 on a car that is now worth $14,000 and it’s totaled in an accident? On a standard auto insurance policy, you would receive “actual cash value”, or in this case $14,000. And the $6,000 difference? You’ll still owe it and your bank or finance company will come to you looking for it.
However, you can prevent this financial pitfall by adding “Gap Insurance” to your auto policy. Gap Insurance can cover the “gap” between the actual cash value of your vehicle and the amount you still owe. In the example above, Gap insurance could cover the $6,000 difference you would otherwise get stuck paying. Simply put, it can pay off your entire auto loan, even if your vehicle is no longer worth what you owe and anyone taking out a lease or a large loan on a new auto should purchase it.
Gap coverage is usually available on new vehicles only and insurance companies normally require that it be added at the purchase or lease date or within a few weeks of purchase. However, be aware that some insurance companies have caps on the amount the Gap insurance will pay and some insurance companies may not offer Gap coverage at all. So it is a good idea to not only add the coverage but ask if the coverage has limitations and restrictions. The devil can be in the details!
Premiums vary from company to company, but I normally see prices range from $30 to $100 per year. Dealers and leasing agents may also offer Gap insurance, but it is often a better value and easier to file a claim if it is part of your current auto insurance coverage.
Enjoy your new car without the fear of a financial backlash and fully protect one of your most valuable assets with Gap coverage on all your new vehicles.