A car accident can be painful and emotionally devastating to deal with. Your trauma from the accident can get even worse when you learn that your insurance company is totaling out your car and that their compensation for the vehicle is not enough to pay off your loan. Essentially, you are in a financial bind that requires you to come up with several hundred dollars or even thousands of dollars in some cases simply to pay off your current car loan. Then, you may need to come up with even more cash to make a down payment on a new car. Such situations are more common than you might think, and this type of scenario can be avoided if you simply purchased gap insurance.
How Does Gap Insurance Work?
The reality is that your standard car insurance policy will only reimburse you an amount up to the current value of the vehicle at the time of the accident or theft. Many people, however, are upside in their car loans. This means that they owe more money on their loan than their car is actually worse. This often happens when you fail to put down a large enough down payment when you buy a car, when you put a lot of miles on your vehicle or even when you take out a car loan with an extended loan term. Gap insurance can be purchased for a rather affordable price in most cases, and it generally pays off the remainder of your auto loan balance that your standard insurance proceeds did not pay off. Some gap insurance will even compensate you for your auto insurance deductible and provide you with some proceeds to purchase a new car with. Each policy is unique, so take time to compare the options fully before you decide which type of coverage you need or if you even need it at all.
Who Should Buy Gap Insurance?
Before you make the decision to purchase gap insurance, it is important to understand how people can get upside down in a car loan. Some people were upside down in their last car loan, and they rolled over the difference into their new car loan. This automatically creates an upside down situation with your current car loan. In other cases, vehicle depreciation is to blame. Vehicles depreciate often at a rate of 10 to 20 percent per year. This may be even higher if you put a lot of miles on your car or are otherwise hard on it through your driving habits. Because you can expect an automatic decline of 10 to 20 percent per year, however, you can see that you start out in the red if you fail to make a sizable down payment on the car. In addition, with a long term loan, you are paying off a very small amount in principal during the first few years of the loan. This can also create an upside down situation. Therefore, the people who gap insurance can benefit most are those who are rolling over a loss from their last car loan, those who need a long loan term, those who drive a lot and those who are not making a large down payment. Anyone with a car loan may find themselves underwater with their loan, so unless you pay for your car in full with cash, buying affordable gap insurance may be wise.
Where Can You Buy Gap Insurance?
If you have decided that you need to purchase gap insurance, you have two primary options available. You can purchase it directly from the dealership or lender when you get your loan. This is typically a one-time fee of several hundred dollars. A more affordable option, however, may be to obtain coverage from your auto insurance provider. The average gap insurance premium is $20 per year, so you may save a modest amount of money by getting a quote from your provider. Remember that coverage benefits vary, so compare policies closely.
Many people will fortunately never need to file a claim against their gap insurance. However, in the event coverage is needed, you will be relieved that you took the time to purchase this additional and beneficial coverage.