What is Gap Insurance?

What is Gap Insurance?

Gap insurance is a type of supplemental auto insurance that kicks in if your automobile is stolen or declared a total loss. Gap insurance compensates for the difference when your loan amount exceeds the value of your vehicle. If you owe $25,000 on your loan but your automobile is only worth $20,000, your gap coverage will cover the $5,000 difference, minus your deductible.

Gap Insurance on a Car: What Is It?

Gap insurance is a type of extra auto insurance that pays the gap between the insured value of a vehicle and the amount owed on the loan or lease.

Gap insurance will cover the difference among both your auto insurance payout and the amount you owe on the vehicle if it is totaled or stolen before the loan is paid off. 1

Your lender may need gap insurance for certain types of automobiles, trucks, or SUVs if you’re financed a vehicle purchase. This includes luxury cars and SUVs, as well as some types of sports utility vehicles, which may degrade and lose value at a higher rate than usual.


How Does Gap Coverage Work?

In the early years of an automobile’s life, it’s relatively easy for a driver to owe the lender or leasing company more than the car is worth. It can be done with a small down payment and a long loan or lease period, at least until your monthly payments add up to enough equity in the vehicle.

When it comes to filing claims and vehicle values, equity must be equal to the car’s current value. If the automobile is totaled, your usual insurance will pay that value, not the price you bought. Cars depreciate significantly during their first few years on the road, which is an issue. In fact, in the first month following purchase, the average automobile loses 10% of its value.

If your car is totaled, your insurance won’t cover the expense of replacing it with a new one. You’ll get a check for the value of a car similar to yours on a used-car lot. This is referred to as the vehicle’s actual cash worth by insurers.

That particular gap is not covered by gap insurance. The reimbursements are calculated on the basis of actual cash worth rather than replacement value, which can assist you to avoid financial losses.

Example of Car Gap Insurance

Let’s pretend you just bought a new automobile for $28,000. You put down 10%, lowering the total cost of the loan down to $25,200.


You secured a five-year car loan. Let’s pretend you got one of those zero-percent new-car financing packages, which means your monthly payment is $420. You’ve paid $5,040 after a year. You owe a total of $20,160.

The car is destroyed a year later, and the insurance company declares it a total loss. You are owed the entire current worth of that vehicle, according to your auto insurance policy. Your car, like the average car, is now worth 20% less than you paid for it a year ago. That’s a total of $22,400.

Your collision insurance will cover the remaining balance on your auto loan, leaving you with $2,240 to put down on a new car.

What if, on the other hand, your car was one of the models that didn’t hold its value as well as others? For example, let’s imagine it’s lost 30% of its value since you bought it. Your insurance check will be $19,600 in that situation. You owe $560 to your lender. And you’ll still need a new automobile, which is why car gap insurance is essential.

Here are two samples of what you might pay if you don’t have automobile gap insurance.

What is gap insurance and what does it cover?

When your car is stolen or wrecked in an accident, gap insurance kicks in. Your complete or collision coverage will pay the actual cash value (ACV) of your vehicle, minus your deductible, if you file a qualified claim. The difference between the ACV of your car and the remaining balance of your loan or lease may be covered by your gap coverage. If your gap coverage has a limit, it may only cover a fraction of your outstanding balance if you owe significantly more on the vehicle than it is worth. It’s worth noting that gap coverage may not cover additional loan costs like financing or excess mileage.

Gap insurance does not cover other damage or injuries that occur as a result of an accident, nor does it cover engine failure or other repairs.

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Is it worthwhile to purchase gap insurance?

Gap insurance is a vital safety when there is a substantial discrepancy between the value of your car and the amount you owe on it. Consider gap coverage in the following situations:

You’ve decided to lease a car: On leased autos, lenders may impose gap coverage.
You put down a smaller deposit on a new car: If your down payment is less than 20%, you may find yourself in a situation where you have negative equity in the vehicle as soon as you leave the showroom.


You have a longer vehicle loan term: The longer your vehicle is financed, the more likely you are to owe more on it than it is worth.

You want to be protected from depreciation: Because some automobiles depreciate at a faster pace than others, understanding your vehicle’s typical depreciation rate will help you evaluate whether you need gap coverage.

If you have a loan rollover, gap insurance can assist protect you from negative equity if you owe more on your loan than your automobile is worth at the time of renewal.

What is the cost of gap insurance?

The cost of gap coverage varies depending on the insurance. Progressive can give you specific pricing for loan/lease payback coverage, which is similar to gap coverage.

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