You’ve probably heard it said before: when you buy a new car, the value depreciates the moment you drive off the lot. This is a risk you’re willing to take in terms of the resale of your car. But what happens if you’re in an accident? If your car is stolen?
In this guide, we will take a look at gap insurance coverage and how it can protect you if your car is financed. What does it cover, is it worth it, and should you purchase gap insurance? Keep reading for answers to these questions and many more.
How Does Gap Coverage Work?
Brand-new vehicles depreciate in value by as much as 20% in the first year. Assuming you pay $30,000 for a vehicle (plus the interest on your loan), that car is only worth $24,000 by the same time the next year. The value will only decrease as you add mileage and account for all the little bumps, scrapes, and everything else that can devalue a vehicle.
Now let’s imagine you’re in an unfortunate accident. You’re okay, but your car is totaled. You still owe tens of thousands on your vehicle, but your insurance will only pay you the car’s current market value. In short, you will be responsible for paying for a car you can no longer drive.
Gap insurance can cover the difference between what your insurance company pays and what you still owe on your car. That means you can go ahead and purchase a new vehicle without rolling over negative equity from your current loan.
Who Needs Gap Insurance Coverage?
If you’ve taken advantage of a “no money down” offer with a dealership, it’s usually a good idea to purchase a gap insurance policy. In fact, anything less than a 20% down payment makes you a good candidate.
However, there are other circumstances that may imply that you need gap insurance. For instance:
- If you own a vehicle that will depreciate in value more quickly than others. Many luxury cars fit into this category, so if you own a BMW, Lincoln, Mercedes, or Maserati, you should probably look into buying gap insurance.
- If you have a long financing term. Many people choose a 36-month financing term when purchasing a vehicle, but if you opted for lower monthly payments, your car loan may be as long as 60 or 72 months. It’s a good idea to consider gap insurance if you anticipate owing on your car this far into the future.
- If you’ve leased your vehicle. In fact, most lease contracts require gap insurance.
- If you’ve rolled a previous loan into your current car loan. For instance, you still owed on your Camry, but really wanted a Corolla, so you lumped the loans together.
- If you drive frequently. High mileage quickly depreciates the value of your vehicle.
The dealership may offer gap insurance, but if that’s not an option they give you, you can purchase the coverage through your insurance company.
How Much Does Gap Insurance Cost?
The premiums you’ll pay for gap insurance will obviously depend upon your insurer. Typically, however, your gap insurance will only cost you a few dollars each month. Coverage ranges from $20 to $40 per year in most cases.
Keep in mind that, in most cases, you’ll also be required to carry comprehensive and collision insurance on your vehicle. You can’t expect to pay for just your state minimum insurance and add gap insurance to that.
The average cost of full coverage auto insurance in the United States is around $1,674 per year. That’s around $140 per month. Adding gap insurance will bring that premium up to about $143 per month.
Instead of paying monthly for gap insurance, you may also have the option of buying a standalone plan. This plan is a one-time cost that will cover you for the year; it will cost around $300.
Should You Purchase Gap Insurance?
In some cases, your lease may require that you purchase this coverage. This protects both you and the bank in the event of an accident or theft of your vehicle.
If gap insurance isn’t required, it still may be a good option for you to consider. Ask yourself:
- Can I pay off my vehicle if it’s totaled?
- Will my existing auto insurance coverage pay for the full market value of my car?
- Does my current auto insurance offer loan payoff?
- Does my current provider offer car replacement or better car replacement?
If you can’t answer any of these questions yourself, talk to your insurance company! Your agent can help direct you to the best solution for you based on your needs and your budget. They will tell you whether or not you should buy gap insurance.
Conclusion: Gap Insurance Cover
New cars depreciate in value the moment you drive off the lot. If you’re in an accident, your insurance coverage limits may not cover what you owe on your vehicle. With gap insurance, you can have peace of mind that you’ll be financially covered and able to get back on the road. It could be an essential addition to your car insurance policy, one that will protect your car loan and ensure you’re not hit with a frightening bill at some point in the future.