If your vehicle were ever to be totaled or stolen, finding out you owe more to the vehicle than it’s worth would make an unfortunate situation even worse. If you have collision or comprehensive insurance, that can help pay for the loss due to damage or theft. However, it’s important for you to know that the insurance company will pay the value of your vehicle in a total loss settlement, not what you owe on the auto loan. If you owe more on the loan than the vehicle is worth, gap insurance can come to the rescue.
How Does Gap Insurance Work?
Let’s say you were in an accident that totaled your car, and you still owe $30,000 on your auto loan. At the time of the accident, your car was worth $25,000. Because you had collision and comprehensive insurance, the insurance company paid for the value of your car minus your $500 insurance deductible. That means the insurance company paid $24,500––leaving you solely responsible for paying the remaining $5,500. However, if you had gap insurance, you would pay the $500 deductible, and the gap insurance would cover the remaining $5,000.
Is Gap Insurance Required?
No, gap insurance is not mandatory. It’s optional insurance that protects you from depreciation. When you buy a vehicle, its value starts to decrease––even as soon as you drive it off the lot. According to Experian, new cars depreciate as much as 20% in value after the first year of ownership and then continue to depreciate by 10% each year. When you make an insurance claim, gap insurance protects you from this loss of value.
Where Can You Get Gap Insurance?
You can purchase gap insurance with the insurer providing you with collision and comprehensive insurance and incorporate it into your regular payment. Or you can add it through The County at a minimal cost and roll the cost into your loan payments. Check with your loan officer about adding gap insurance to your vehicle purchase.
While entirely optional, ap insurance can be a valuable safeguard. Whether you have a current auto loan or you’re looking into purchasing or leasing a vehicle in the future, this coverage can lessen the financial strain of a vehicle loss.