If you’ve recently bought a new car and had to take out a loan to purchase it, then you really want to consider gap insurance.
First off, gap insurance goes by many names. Some other common names include loan/lease gap and auto loan/lease security, for example. So, what IS gap insurance?
The simplest explanation is this: it pays the balance of an auto loan or lease after a covered total loss.
You buy a car and finance $30,000 of the purchase price. One month later, you run into someone and total your car. Remember that the majority of auto insurance claims are paid based on the Actual Cash Value of the vehicle-that is the value of the vehicle AT THE TIME OF THE LOSS. Can vehicles depreciate? Absolutely and they do! The value of a new vehicle drops about 20% in the first year of ownership and about 15% per year for the next four years.
Let’s say that the vehicle’s Actual Cash Value at the time of loss is $22,000. That is ALL the insurance company is going to pay you. But you still owe the $30,000 to the bank. And No…. they don’t just give you a free pass and say, “Oh well, you don’t have to pay it back since you no longer have the car.” NOPE.
So you collect $22,000 from your insurance company. Based on my math, that means $30,000 – $22,000 = $8,000 left to pay to the bank. Who pays that $8,000? YOU DO! YIKES…….
If you have gap insurance, it pays the $8,000. WHAT? Yeah- it’s pretty amazing. Because there is nothing worse than paying a loan back on a car you no longer own. And it does happen. We’ve seen it happen.
Before you think this is the golden ticket, there are some situations where gap insurance does not pay.
It’s usually just an addition (AKA endorsement) to your auto insurance policy. Premium can vary among company, but I can say with certainty that any premium charged is still a SMALL amount compared to the possible payout. We’ve seen premiums ranging from $10-$70 for one year. Carriers will also have rules to determine if you can get it based on things like age of vehicle and whether previously titled or not.
Also, most companies will require both comprehensive and collision on your vehicle. However, if you’ve just bought a new car, and financed it, you’ll be required to have both anyway.
It’s important to note that gap insurance is often available from the dealership. I’m confident that the intent is the same whether you purchase from the dealership or your car insurance. You would just need to ask the dealership for the particulars of theirs. The cost is usually added to your monthly loan payment.
Have questions about what you've read? Feel free to contact your local FUSA Insurance Agent and they can help you out!Find an Agent