What You Should Know About GAP Insurance

Discover what you should know about gap insurance in safeguarding your automotive and financial interests. Unravel the mechanics of gap insurance, explore its benefits, and learn how it can be a safety net. Make informed decisions on GAP insurance.

As licensed drivers, we take great pride in owning and driving our cars, be they brand new or well loved. While we strive to be responsible and cautious on the roads, unfortunate events like accidents and theft can happen unexpectedly. In such moments, the last thing anyone wants is to be burdened with financial setbacks, especially if they still owe a considerable amount on their car loan or lease. This is where GAP insurance, also known as Guaranteed Asset Protection, comes to the rescue.

In this article, CheapInsurance.com will shed light on what it is, how it works, and why it’s an essential consideration for every car owner. Whether you’re a new driver or have years of experience behind the wheel, understanding GAP insurance will empower you to make informed decisions about protecting your vehicle.

From unraveling the mechanics of this additional coverage to your automobile insurance, to exploring its benefits and limitations, we’ll leave no stone unturned. We’ll address common questions like “Do I need GAP insurance?” and “How much does GAP insurance cost?” Additionally, we’ll discuss how car insurance can serve as a safety for this certain situation.

What is Gap Insurance?

GAP insurance, short for “Guaranteed Asset Protection,” is an additional type of insurance that covers the “GAP” between the outstanding loan amount on your car and its actual cash value. When you buy a new car, its value depreciates the moment you drive it off the lot. If your car gets stolen or is declared a total loss in an accident, your primary car insurance will only cover the current market value of the vehicle. This might not be enough to pay off the remaining loan balance, leaving you financially responsible for the difference. Here’s where GAP insurance steps in.

How Does This Type Of Car Insurance Work?

Let’s understand how it works with a scenario. Imagine you purchased a new car for $30,000, and a year later, you still owe $25,000 on your loan. Unfortunately, your car is involved in a severe accident, and the insurer declares it a total loss. At this point, your primary insurance will assess the car’s current value, which might only be $20,000 due to depreciation. Without GAP insurance, you would have to cover the remaining $5,000 on your loan out of your pocket.

However, it will step in and cover the $5,000 shortfall, ensuring that your loan is fully paid off, and you’re not left with a financial burden. This safety net is particularly beneficial for those who have purchased a new car with a low down payment or those who have leased a vehicle.

What Does This Additional coverage On My Inexpensive Auto Insurance Cover?

If you’re considering purchasing GAP insurance, understanding what it covers is crucial. It provides valuable protection in specific situations where your primary car insurance may fall short. Let’s explore what gap insurance covers and how it can act as a financial safety net during unforeseen events.

Vehicle Depreciation:

The primary purpose of gap insurance is to cover the depreciation of your vehicle. As soon as you drive your new car off the lot, it starts to lose value. In case of an accident or theft, your standard car insurance will only reimburse you for the current market value of the vehicle, not the original price you paid for it. This can lead to a significant shortfall between the amount you owe on your car loan and the insurance payout.

GAP insurance steps in to bridge this gap, covering the difference between the actual cash value of your car and the amount you owe on your loan or lease. By doing so, it ensures you are not left with an outstanding loan balance to pay off even after your primary insurance settlement.

Total Loss Accidents:

In the unfortunate event of a total loss accident where your car is severely damaged and deemed beyond repair, it becomes extremely valuable. Your primary insurance will assess the car’s current value and provide you with a payout based on that amount. If your loan balance is higher than the payout, you would be responsible for covering the difference out of pocket.

GAP insurance steps in to cover this difference, ensuring that you’re not burdened with paying off a loan for a car you no longer possess or can use. This financial protection can be a lifesaver in times of distress.

Theft:

Car theft is a distressing experience, and the last thing you want to worry about in such a situation is the financial aspect. If your car is stolen and not recovered, your standard insurance will reimburse you based on the car’s value at the time of the theft. As we know, this value can be significantly lower than what you owe on your loan.

This type of insurance comes to your aid by covering the gap between the insurance payout and the remaining loan balance. With gap insurance, you can focus on replacing your stolen vehicle without the added stress of outstanding loan debt.

Unpaid Fees and Deductibles:

GAP insurance may also cover additional expenses related to your car insurance claim, such as deductibles and unpaid fees. In some cases, your primary insurance may not cover certain fees or require a deductible to be paid before processing the claim. This addition to your cheap auto insurance can step in to cover these costs, further reducing your financial burden during an already challenging time.

Negative Equity:

Negative equity occurs when you owe more on your car loan than the car’s actual value. This situation often arises in the early stages of a car loan when the vehicle’s value depreciates faster than you’re paying off the loan. GAP insurance can provide a safety net in case of negative equity, ensuring that you’re not left in a difficult financial position.