How much is the fair market value dropping over time? Then compare that with the loan payment schedule on your new car and see how much principal you will still owe on the loan at six months, one year, and two years out. Are you likely to still owe more on the loan than the vehicle is likely to be worth? If yes, then gap insurance is worth considering. If you are likely to owe more on your car loan or lease than your car is likely to be worth during the duration of the loan or lease, can you afford to cover the difference out of pocket?
If not, then gap insurance may be a good idea. Is your vehicle a popular model for car thieves? This tends to skew the results toward vehicles that simply have more units on the roads. Editor's Note: This page has been updated for accuracy and relevancy [cha 9. Contact Us Free Consultation Search Search Search. Actively scan device characteristics for identification.
Use precise geolocation data. Select personalised content. Create a personalised content profile. Measure ad performance. Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. Car insurance is necessary to stay protected financially on the road.
In addition to liability insurance and collision coverage, you may also need to purchase gap insurance. Gap is an insurance industry acronym for "guaranteed auto protection". Whether you need car gap insurance can depend on the type of vehicle you purchase or lease.
But is gap insurance worth it? It may be if you believe you may owe more money on a vehicle than your comprehensive auto insurance policy would pay out if you were to file a claim. Gap insurance is a supplemental auto policy that covers any difference between the insured value of a vehicle and the balance of the loan or lease that the owner must repay.
If your vehicle is totaled or stolen before the loan on it is paid off, gap insurance will cover any difference between your auto insurance payout and the amount you owe on the vehicle. If you're financing a vehicle purchase, your lender may require you to have gap insurance for certain types of cars, trucks or SUVs. Specifically, this includes vehicles that may depreciate and lose value at faster rates than usual, such as luxury sedans or SUVs or certain types of sports utility vehicles.
Some dealers offer gap insurance at the time you purchase or lease a vehicle though it's important to compare the cost to what traditional insurers may charge. A small down payment and a long loan or lease period are enough to do it, at least until your monthly payments add up to sufficient equity in the vehicle. In terms of filing claims and vehicle valuations, equity must equal the current value of the car.
That value, not the price you paid, is what your regular insurance will pay if the car is wrecked. The problem is that cars depreciate quickly during their first couple of years on the road.
If your vehicle is wrecked, your policy won't pay the cost of replacing the car with a brand-new vehicle. Gap insurance doesn't cover that particular gap. The payouts are based on actual cash value, not replacement value which can help to minimize financial losses to you. You got a five-year auto loan. One year later, the car is wrecked and the insurance company writes it off as a total loss.
According to your auto insurance policy, you are owed the full current value of that vehicle. But what if your car was one of the models that don't hold their value as well?
And you still need a new car, which is where having car gap insurance becomes important. Here are two examples of what you could pay, with or without car gap coverage. If your lender says you must buy gap insurance, the Consumer Financial Protection Bureau suggests that you ask to see where that requirement is noted in your sales contract. Gap insurance is typically purchased at the time you buy comprehensive and collision coverage, though you might be able to get coverage after you buy a vehicle.
But some insurers have requirements to purchase gap insurance, like the car needing to be no more than two or three model years old. But gap insurance through a dealer is typically more expensive.
Just remember to shop around and get quotes from multiple insurance companies. This is where gap insurance can come in handy. Gap insurance supplements the payout you get from collision and comprehensive coverage if your car is totaled or stolen. Comprehensive and collision insurance pay only what a car is worth at the time of a theft or accident. When you owe more on your car loan or lease than that, gap insurance comes to the rescue.
Although rare, some gap insurance can also cover your comprehensive or collision deductible, the amount subtracted from a claim payout. Below is that example in a nutshell. Difference between the value of your car minus deductible and your loan balance. With gap coverage, driver pays. Without gap coverage, driver pays. Ultimately, if you do have a lease or newer loan, you want to think about whether you can afford to pay the difference between its balance and the value of your car.
You can generally only buy gap insurance within three years of buying a new car. Your car is no more than two to three years old. You are the original owner of the vehicle. There are three main ways to buy gap insurance:. From your auto insurer , as part of your regular insurance payment. From a company that sells gap insurance only.
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