How does my gap insurance work on a car loan?

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Reviewed byBrad Larsen
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UPDATED: Mar 19, 2020

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Here's what you need to know...
  • A gap insurance policy covers the difference between what your car is worth at the time of the accident and the amount of money you will owe on your car loan
  • Standard insurance policies only pay up to your car’s value just prior to the accident
  • A comparison tool can help you find an affordable gap insurance policy

Gap insurance is aptly named because it covers the gap between what your car is worth and what you currently owe on your car loan. This means that if you get into an accident and your car is totaled, your regular insurance policy will cover up to the current value of your car.

Your gap insurance will cover the difference between what your car is worth and what you still owe on your car, which protects you against significant financial losses after an accident. To find an affordable gap insurance policy, you can use our free comparison tool above. Just enter your zip code to get started!

Gap Insurance Explained

It is important to understand that your gap insurance policy only covers the difference between what you owe on your car and the value of your car at the time you get into the accident that resulted in your car being totaled by your insurance company. Gap insurance does not cover repairs to your vehicle after an accident.

For example, let’s say that you bought your car last year and 12 months into making your car payments, you get into an accident at an intersection that results in repairs that cost more than your car is currently worth. In this instance, your car would be totaled by your insurance company.

Your standard insurance policy will cover the cost of your vehicle up to its current worth. This means that if your car is worth $10,000 at the time of the accident, your standard insurance policy will pay you $10,000 towards the purchase of a different car.

If you still owe $15,000 on your vehicle, you would be responsible for paying the remaining $5,000 if you did not have a gap insurance policy. If you do have a gap insurance policy, that policy would pay the remaining $5,000. This helps ensure that you are not making payments on a car that has been totaled while trying to find a new car.

Items Gap Insurance Does Not Cover

Many states offer explanations of gap insurance policies on their state car insurance websites. These explanations usually include what you can expect and not expect from your insurance policy. Before you purchase a policy, it is extremely important that you understand what it does not cover.

  • Car Repairs – Gap insurance does not pay for repairs to your vehicle after an accident or at any other time. Repairs that are not the result of a car accident are your responsibility. Repairs that occur as the result of an accident should be paid for by your standard insurance policy, assuming you file a claim and your claim is accepted.
  • Car Payments – Gap insurance will not make your car payments for you for any reason, and it will not pay for any missed payments if you totaled your car and were behind on your loan.
  • Other Loans – If your car is repossessed for non-payment, gap insurance will not pay off your loan. If you rolled other loans or credit obligations into your car loan, gap insurance will not pay any money towards the loans that do not directly apply to the vehicle.
  • Rental Vehicles – Gap insurance also will not pay for rental cars while your car is being repaired after a car accident.
  • Down Payments – Your gap insurance policy will not provide you with money for a down payment. It is only designed to make sure that you do not owe any money on a car that has been totaled due to a car accident.

If you need rental car coverage, roadside assistance or additional coverages on your vehicle, you should use a comparison tool to find a standard insurance policy that includes everything you need. If you don’t have a gap insurance policy on your new vehicle, you can use a comparison tool to find a good gap insurance policy at the same time you shop for standard coverage.

Reasons to Consider Gap Insurance

Just because gap insurance doesn’t cover every possible scenario involving your car, doesn’t mean there aren’t some very good reasons to purchase a gap insurance policy.

  • You are underwater on your car loan the minute you drive off the dealership lot.
  • You can’t afford to pay the difference between your car’s depreciation and the cost of the loan from your personal finances.
  • You paid the minimum for the down payment.
  • Your car loan is for six years or more.
  • Your lender is requiring a gap insurance policy.

Finding an Affordable Gap insurance Policy

When you go to purchase your new car, the dealership may try to persuade you to buy a gap insurance policy from them. However, this is often not in your best financial interest. Car dealerships heavily inflate the prices of their gap insurance policies and keep the difference between the actual policy cost and what you paid.

To avoid paying inflated premiums amounts for your gap insurance policy, you should shop around with a comparison tool before going to sign the paperwork and pick up your new car. This is because a comparison tool will pull up multiple gap insurance policies from several different car insurance providers, which will allow you to view the prices of each policy and the details before you purchase.

Get started right here and now by entering your zip code into the box below!

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