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Gap insurance, which stands for "guaranteed asset protection," is an optional type of auto insurance that covers the difference between what you owe on your car loan and the actual cash value of your vehicle in the event that it's stolen or totaled in an accident. While standard auto insurance policies typically only cover the market value of the car at the time of the claim, gap insurance provides an extra layer of financial protection for those who have a loan or lease on their vehicle.
When you finance or lease a car, there's often a period of time when the amount you owe on the vehicle is higher than its actual cash value. This is because cars depreciate quickly, especially in the first few years of ownership. If your vehicle is stolen or deemed a total loss during this time, your standard auto insurance policy will only pay out the current market value of the car, leaving you responsible for the remaining balance on your loan or lease.
This is where gap insurance comes in. If you have gap coverage and your car is totaled or stolen, your insurer will pay the difference between the vehicle's actual cash value and the amount you still owe on your loan or lease, minus your deductible.
Let's say you finance a new car for $30,000. A year later, you're involved in an accident that totals your vehicle. At the time of the accident, your car's actual cash value has depreciated to $20,000, but you still owe $25,000 on your loan.
If you have collision coverage, your standard auto insurance policy will pay out $20,000 (minus your deductible) to your lender. However, you're still on the hook for the remaining $5,000 balance on your loan. If you have gap insurance, your insurer will cover that $5,000 difference, so you can pay off your loan in full and move on.
Gap insurance is designed to complement your collision and comprehensive coverage. It kicks in when your vehicle is declared a total loss due to a covered peril, such as:
Gap insurance covers the difference between your vehicle's actual cash value and your loan or lease balance, minus your deductible. However, it does not cover:
There are certain situations where having gap insurance can provide valuable peace of mind. You may want to consider purchasing gap coverage if:
On the other hand, there are times when gap insurance may not be necessary, such as:
There are several places where you can purchase gap insurance, including:
The process of getting gap insurance is relatively straightforward. Here are the steps:
Keep in mind that you'll need to have comprehensive and collision coverage on your vehicle in order to purchase gap insurance. Additionally, some insurers require that you buy gap coverage within a certain timeframe after acquiring your vehicle (e.g., within 30 days of purchase).
When John's brand new Toyota Camry was stolen from his driveway just 6 months after he bought it, he was devastated. He still owed $28,000 on his auto loan, but his insurance company only paid out $24,000, which was the car's actual cash value at the time of the theft. Luckily, John had purchased gap insurance, which covered the $4,000 difference. Without it, he would have been stuck paying off a loan for a car he no longer owned.
Gap insurance can be a valuable investment for those who have a loan or lease on their vehicle and want extra financial protection in case of theft or total loss. By covering the difference between what you owe and what your car is worth, gap coverage can help you avoid paying thousands of dollars out of pocket in the event of a worst-case scenario.
However, gap insurance isn't right for everyone. If you own your car outright, have a significant amount of equity in your vehicle, or are comfortable with the risk of having to pay off your loan balance in the event of a total loss, you may not need gap coverage.
Ultimately, the decision to purchase gap insurance comes down to your individual financial situation and risk tolerance. Consider the cost of coverage, your vehicle's value and depreciation rate, and your ability to pay off your loan or lease balance in the event of a total loss. By weighing these factors carefully, you can make an informed decision about whether gap insurance is right for you.
More than a decade of Ivan's career has been dedicated to Finance, Banking and Digital Solutions. From these three areas, the idea of a fintech solution called Debepxert was born. He started his career in Big Four consulting and continued in the industry, working as a CFO for publicly traded and digital companies. Ivan came into the debt industry in 2019, when company Debexpert started its first operations. Over the past few years the company, following his lead, has become a technological leader in the US, opened its offices in 10 countries and achieved a record level of sales - 700 debt portfolios per year.
