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GAP insurance is a type of car insurance which provides coverage for the GAP between the book value or replacement value of a car and the amount of your auto loan or lease obligation.
Why do you need GAP insurance?
Anyone buying a late model car (especially brand new vehicles) with a minimal down payment can experience a couple years where the car is worth less than the amount owed on the car loan. The book value of a car can drop 25% or more as soon as you leave the car dealership and car insurance companies often only insure vehicles by the book value when it comes to replacement coverage.
If you buying a car this mean that the insured amount of your vehicle in a total loss accident will be far less than what you owe the car loan company during the first couple years. If a total loss happens (and you have the right type of car insurance) then a car insurance company will reimburse you for the cost of vehicle up to its book value. Any difference in the car loan balance and the book value you are personally liable for. Drivers with GAP insurance will receive additional monies to cover this GAP however drivers without this type of insurance will end up with no vehicle and a large debt. Imagine this scenario:
- You purchase a vehicle for $40,000
- 12 months later you suffer total loss and the vehicle is written off
- The car insurance company offer book value replacement value of $26,000
- Your car loan balance is $37,000
In the scenario above the difference between your car loan balance and the book value is $11,000. Without GAP insurance you now have an $11,000 debt to the car loan company. If you purchase this insurance however your liability would be ZERO as the car insurance company would pay this difference. This is a very common event especially for first time buyers.
How much is GAP car insurance?
GAP insurance is very cheap for most drivers with an additional cost of under $20 a month for most vehicles.
What are the types of GAP auto insurance?
There are 3 types of GAP insurance including Simple GAP , GAP Waiver and GAP endorsement.
Simple GAP Insurance
Additional insurance purchased from a licensed car insurance company
Where the car loan company agrees to waive the difference (GAP) between your car loan balance and the insurance company replacement check in return for a small increase to your auto loan payments
An amendment to your current auto insurance policy adding this type of coverage.
Anyone financing a late model vehicle should consider adding GAP insurance but even some older cars can benefit from this type of car insurance.
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