When it comes to having an automobile, there’s no lack of expenses, ranging from loan payments on a monthly basis to insurance fees. But one kind of insurance that’s often ignored can be gap insurance. In spite of its importance, a lot of motorists aren’t aware of its purpose and how it operates and how it can transform the way they think in certain circumstances. Understanding gap insurance is vital especially for those who are financing or leasing their cars.
What Is Gap Insurance?
Gap insurance, also known as “Guaranteed Asset Protection,” is designed to pay for the difference between the amount you are owed on your lease or car loan and the Actual Cash Value (ACV) when it is the case of full loss or theft. This kind of insurance becomes necessary when the value of your car decreases more quickly than the credit balance. In the absence of gap insurance you may end up paying to purchase a car that you don’t will ever own.
Let’s take an example. For instance, suppose you buy a brand new vehicle for $30,000 and then you take out a loan to cover the expense. After a year, your car’s value decreases to $22,000, yet the loan balance is $26,000. If your car is destroyed or stolen and your auto insurance will only cover only the $22,000 ACV, which leaves an additional $4,000. This is when gap insurance comes in, covering the rest of the amount and helping to prevent financial stress.
Who Needs Gap Insurance?
Although gap insurance isn’t required however it is highly advised for certain drivers. In the case of leasing a vehicle and leasing companies typically will require you to have gap insurance in the lease agreement. But, for those financing a car it is an excellent investment in certain situations.
Gap insurance can be particularly advantageous for those who took out a smaller down payment or opted for the longer loan period. These types of situations usually result in a slower reduction of the balance of loans as compared to the speed of depreciation. In addition, if you own the kind of vehicle that has a reputation for its high depreciation rate the gap insurance can provide an additional layer of security.
How Does Gap Insurance Work?
The procedure of using gap insurance is easy. If you experience an entire loss or theft the auto insurance company will first establish the value of your car in cash and then issue a payment in accordance with that figure. If the payout isn’t enough to cover the remaining balance of the lease or loan gap insurance fills in the gap.
It is important to remember that gap insurance won’t provide all the protection you need. It will not cover late payment of loans, penalties as well as extended warranties. Furthermore, it does not account for the deductible that you have on the auto insurance plan. Drivers must review the conditions in their insurance gap policy in order to be aware of its limitations.
How to Get Gap Insurance
The process of acquiring gap insurance can be obtained through various ways. A lot of car dealerships offer it as an additional option when you buy or lease a car. While it’s convenient, this service may be more expensive when than alternatives. Insurance companies offering auto insurance also offer gap insurance as a second protection option, usually with a lower price. Some lenders also include gap insurance in loan agreements, therefore it is worth examining your terms for financing before looking into different possibilities.
If you’re looking to purchase gap insurance, you should compare rates and coverage options to determine the most affordable price. Remember that gap insurance tends to be cheaper when it is it is purchased through your auto insurance instead of the dealer.
Is Gap Insurance Worth It?
The decision of whether gap insurance is worthwhile is contingent on your financial situation and the details of your vehicle’s ownership. If you’ve put a substantial down payment, and your vehicle’s value is in line to your credit score, then gap insurance may not be required. If, however, you paid for the bulk of the purchase or chose to extend the time frame gap insurance could give you assurance.
Think about the financial risk of being in a position to be underwater with your loan for your automobile in the case that you are involved in an accident. The small expense of gap insurance when compared to the possible out-of-pocket costs can make it an affordable option for many motorists. In addition, because vehicles decrease in value rapidly, sometimes losing 20 percent of their value within the first year of ownership–gap insurance provides an insurance policy against this devaluation rapidity.
Understanding the Limitations of Gap Insurance
Although gap insurance can provide an important level of protection, it’s crucial to understand its limitations. The type of insurance only is available for total losses or thefts. It doesn’t assist with minor injuries or repairs. In addition, gap insurance won’t provide coverage for the cost of replacing an automobile, so it doesn’t offer funds to buy a new vehicle following the loss.
It is important to be aware gaps insurance can be only temporary. When your loan balance is aligned with or decreases from the market value of your vehicle, the insurance is no longer needed. Monitoring your loan balance regularly and the value of your vehicle can assist you in determining the best time you should end your gap insurance plan.
Final Thoughts on Gap Insurance
Gap insurance is often overlooked but essential type of insurance for a lot of automobile owners. In addition to covering the gap between your vehicle’s value and the debt or lease balance it protects your financial position and helps avoid unanticipated debt in case of a complete destruction or loss. While not every person needs gaps insurance, this is a good choice for drivers with significant debt balances, low deposits, and leasing cars.
Before you purchase gap insurance, you should take time to assess your financial situation and the details of your vehicle’s ownership. If you decide to purchase it to your auto insurance or a lender, or a dealer, knowing its advantages and drawbacks helps you make a well-informed decision. In the final, gap insurance may be a safety protection that protects you from getting into financial trouble in the event of an unfortunate accident.