Gap insurance is a type of car insurance that protects owners against the loss that arises when the amount of compensation received from a total loss does not cover the amount owed on the vehicle’s lease or financing.
Understanding Gap Insurance
For example, Dave owns a car worth $15,000 but still owes a total of $22,000 on the vehicle. Dave is in an accident that results in a total loss and his car insurance will reimburse him the $15,000. But since Dave owes $22,000 on the vehicle, he is $7,000 short and no longer has a vehicle. If Dave had purchased gap insurance, it would have covered the difference.
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Who Needs Gap Insurance?
Gap insurance is a good idea for anyone that owes more than the value of the vehicle. It is also a good choice for anyone with an increased risk of accidents, like young drivers. Here are some specific examples of people who need gap insurance.
- You take out a car loan with a long term (more than 60 months). Long-term loans take longer to reach the break-even point when your loan balance equalizes with the car’s value.
- You financed a car with little or no down payment. In this situation, you will be upside down in your auto loan the minute you leave the lot. It will be several years before you reach the breakeven point.
- You plan to put too many miles on the car too quickly. A lot of miles reduces the value of a vehicle. The faster you add those miles, the faster your car depreciates.
- You traded-in an upside-down car. This means the balance you owed on the trade in is added to your new loan. This can be very difficult if the new car is totaled or stolen.
- You bought a car with bad resale value. If you buy a car that will quickly lose value, you could be upside down on the loan unless you made a very substantial down payment.
Gap Insurance Benefits
Gap insurance is a great way to protect your finances and retain peace of mind. It is a very sensible choice for many people. To learn more about the benefits of gap insurance and if it’s right for your financial situation, speak to the professionals at Argent Bridge Advisors today.