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Gap Auto Insurance

Basically, gap auto insurance covers the "gap" between what you currently owe on your auto loan and the current fair market value of your vehicle. Comprehensive and collision policies only cover your car’s fair market value, which can be as little as 80% of what you originally paid for your car. In the event that you’re involved in an accident and your car is “totaled,” or stolen, and was not recovered, you could owe the company that financed the vehicle up to 20% over and above the amount your auto insurance company paid you for the vehicle.

From an auto insurance standpoint, if your car is stolen and not recovered by the authorities, your insurer views the loss in the same manner as an at-fault accident on your part; meaning that comprehensive insurance covers the value of the vehicle, but not necessarily the amount you owe to the financing entity. As a result, you could be stuck paying thousands of dollars for a car you can’t even drive!

A Gap Insurance Example

If your loan amount is $24,000 on a new vehicle and immediately after signing the loan papers you total the car, then your car insurance will likely only give you the Blue Book quote amount. You would receive a check for around $21,000, but you still owe an excess of $3,000 on the loan. This gap in coverage is covered by the gap auto insurance policy.

Purchasing Gap Insurance

This type of coverage is a must have for any new car purchase, as the car’s value drops significantly as soon as it is driven off the car lot. Gap insurance is not required when you buy a new car, but in the case of an accident, this type of coverage can protect your investment.

Many states now require that all companies who sell auto insurance also offer gap coverage as well. If your current company does not offer gap insurance, you can often purchase it from a company as an independent policy.

Who Needs Gap Insurance?

Anyone leasing a vehicle will generally be required to purchase gap insurance; however, those purchasing a new car should strongly consider purchasing gap coverage as well: As a rule of thumb, the more expensive the new car purchase, the greater the need for this extra coverage.

You should consider purchasing gap insurance if:

  • You purchased a new car and didn't have a down payment of at least 20%.
  • If you live in a high theft area, you may wish to buy the added coverage.
  • You're leasing a car
  • You're financing for more than four years
  • You rolled debt from your last car into your current auto loan.

Gap insurance is not optional coverage you'll need for a long period of time. And given it is relatively inexpensive, gap insurance should definitely be considered if the down payment you made on your car was less than 20%. A small down payment normally leaves you owing more on the car than it’s worth for two to three years, depending on the length of your loan. If you’re in an accident, or the car is stolen during that period, you could be in financial trouble.

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