How Does Gap Insurance Work?
There’s nothing like the thrill of a new car. Getting behind the wheel of your new ride can leave you feeling exhilarated. While buying a car is exciting, it’s also important to consider the consequences if an accident were to occur.
While your standard vehicle collision coverage may cover the value of your car, you may still be on the hook if your auto loan is greater than the depreciated value of your vehicle. According to Edmunds data, a new car may depreciate 30.4% its first year, 7.7% the second year, and 6.8% the third. For this reason, your car may lose value faster than you pay it off. And that is where gap insurance comes in.
Read on to discover why you may need gap insurance and whether it makes sense for your future insurance needs.
What Is Gap Insurance?
If your vehicle gets totaled, damaged or stolen, standard auto insurance will cover your vehicle’s depreciated value. Therefore, if you owe more on your car loan than what the vehicle is worth, you could end up having to pay out of pocket to cover the difference. This could leave you upside down on your auto loan.
Gap insurance is also called "guaranteed asset protection" insurance. It fills in the gap between what your insurance provider covers and the auto loan balance of your car.
How Gap Insurance Works
To help you better understand how gap insurance works, here is a simple example:
Let’s say you purchased a new vehicle for $20,000. A few years later, your car gets totaled in an accident. If you still owed $15,000 on your car loan, yet the depreciated value was $14,000, you would still have to pay the $1,000 to your lender to cover the rest of the loan amount. This would then settle the total car loan. But if you have gap insurance, the policy will cover the $1,000 difference and you may not have to pay anything but your deductible on the car.
What Does Gap Insurance Cover?
For gap insurance to pay any claims, you must have a basic car insurance policy. If you owe more on your car than it’s worth, then gap insurance may also apply if your vehicle gets stolen or totaled. The term "totaled" means your car’s repair expenses exceed its value.
Keep in mind, most insurance providers have their own gap insurance guidelines. For instance, it may only cover the difference of a stolen car after a 30-day waiting period, while another provider may have a shorter or longer waiting period after you submit a claim. Review your policy contract and research your policy online.
Gap Insurance Exclusions
To avoid any confusion about what your policy covers, here are some of the expenses your gap policy may not take care of:
- Late auto loan or lease payments
- Property damage
- Repossessed cars
- Injuries that result from the accident
- Rental cars
- Extended vehicle warranties
- Lost wages
- Equipment that wasn’t installed by the factory
- Medical expenses
- Deductible costs
- Balances from previous auto loans
- New car replacement
- Loan or lease deposits
- Funeral expenses
It’s important to note that in the example mentioned, the reimbursement from the insurance company would go to pay off the car loan from the lender. If you need help purchasing or leasing a new vehicle you may want to consider adding car replacement coverage. Sometimes you can purchase this extra coverage as an add-on when buying a brand-new vehicle.
Does Gap Insurance Cover If I'm At Fault?
Whether or not you’re at fault for an accident, gap coverage will usually help you pay the difference of the value of your car versus what your standard auto policy covers. It’s important to understand your specific gap insurance policy and its guidelines so you can better prepare for when an incident does occur.
Where Can I Buy Gap Insurance?
You can purchase gap insurance from the dealership, financial institution, insurance providers or a gap insurance provider. When you purchase a new vehicle, the dealership normally offers a gap insurance policy when you sign your loan documents. It can then go into effect right after you sign the contract.
When you purchase gap insurance in this way, you can expect to pay a flat premium of $500 to $700. Since gap insurance goes into the loan amount with interest, it may be more expensive if it’s purchased in this manner.
That said, check with your insurance provider before you buy a policy from the dealership. While the cost may vary depending on your insurance provider, usually gap insurance is 5% to 6% of your physical damage coverage costs. Therefore, if your collision coverage costs $500, your gap insurance would be about $25.
Is Gap Insurance Worth The Money?
According to the Insurance Information Institute, you may want to consider gap insurance if you put less than 20% down on your car, if your car loan term is over 60 months, or if you’re leasing a car. If you’re leasing a car, first check if gap insurance is already included in the contract before buying an extra policy.
If you don’t meet these criteria, you may want to weigh out the pros and cons of this purchase, just like any other financial situation. You’ll want to decide how much you owe on your auto loan versus the value of the car. You can estimate the value of your car by visiting sites such as Kelly Blue Book. While this may not be the exact value of your car, it will give you an idea. If you could afford to pay the difference in the value of your vehicle versus the rest of your car payment, you may want to forgo coverage.
You may not have the option to buy gap insurance if you’re not purchasing a new vehicle or leasing one. So, make sure you have extra cash set aside to pay for the difference if you buy a used car.
As you evaluate whether to buy gap insurance, you may have more questions specific to your situation, including if you can cover the upfront cost. If not, we can help. Our auto personal loans help you get the money you need to cover your vehicle expenses.
At Rocket Loans, we offer personal loans with transparent fees and using a simple application process. If you don’t have the money to pay for a vehicle-related expense such as gap insurance upfront, an auto personal loan can help you cover these costs and fill in the gap – letting you get to where you need to go.
Better yet, go enjoy your new and improved vehicle with a single, automated monthly payment.
Ready To Improve Your Financial Life?
Apply for a personal loan today to consolidate your debt.Apply For A Loan
When Should You Cosign On A Loan?
Read our guide on everything you'll want to understand before co-siging a loan.
What Is A Good Interest Rate?
Curious what makes up an interest rate? This article will explain exactly what an interest rate is and the different types of interest rates.