Gap insurance is for protection against the difference between the value of your car, and the amount you owe on the loan. If you were to get into an accident that totaled your car, an insurance company will pay you the cash value of the car. If your loan balance is greater than the cash value of your car, you must pay the balance of the loan. The lender doesn't care if you didn't get enough money for your car from the insurance company, the insurance company is under no obligation to discharge the outstanding balance. The following are a few things you should understand about this type of insurance.
You may not realize the importance of this coverage
It is common for car owners to be unaware of this coverage. They mistakenly believe they have full coverage, so this is included, or they are unaware of its existence until it's too late. If you don't have gap insurance, and your car is a recent model, you can easily be stuck with a significant balance on your loan. If your down payment was not high, and you have only made a few payments, this gap can easily be four figures.
You can determine the need for gap insurance yourself
First, determine the fair value of your car. The condition of your car is important, so you will need to be honest with yourself. You then need the pay-off amount for your car loan. In other words, if you were to write a check to pay off your car loan, what would the amount be? If the amount owed is higher than the value of your car, then this figure is the gap. This is what you will owe to your lender if your car is completely destroyed. Only you can determine whether taking the risk is something you are comfortable with. If not, call an insurance agent.
You may need gap insurance, even for an older car
Although used cars depreciate less than new ones, if your car is a recent model, there may be a large amount of depreciation to be realized in the next couple of years, so gap insurance may be important. Another factor in being upside down in your loan is the amount of your down payment. Even though your car is older and less likely to depreciate as quickly as a new car, a small down payment may create a gap that requires insurance.
As long as your car is worth less than the amount of your car loan, you should consider gap insurance. It protects you from owing money to your lender when your car is totaled in an accident. Once your car is worth more than the outstanding balance of the loan, you can drop the insurance.
For more info, contact a local auto insurance agent.
Insurance is something that I carry in the hopes that it never has to be used. Along with life coverage, I also have low cost auto insurance and a health plan through my employer. I'm toying with the idea of adding some additional coverage, just in case something happens and I'm no longer around to take care of my family. The question that is on my mind is how much insurance is enough? Do I really need more, or would it be better to cultivate other assets that my loved ones can draw on if needed? If you are in the same boat, let's journey together for a while. Read on and I'll explain what I'm trying and why. Together, we can figure out when it is time to add more coverage and when enough really is enough.