Gap insurance is a type of auto insurance. It provides coverage to you if you have damage to your vehicle in a covered incident that leads to significant loss due to the loan of the car. Making the decision to buy it can seem hard to do. Should you invest in gap coverage? Is it really worth the money? Here’s why it may be vitally important.
A Typical Situation
According to some reports, the average value of a new vehicle is about $34,000. That’s an incredibly large amount of money, but since cars are lasting longer, you may decide it is affordable to you. You buy your car. You drive it home. You are now paying a loan that’s pretty high and likely have a five-year repayment period. You purchase auto insurance to protect this investment.
What happens if an accident occurs within the first few months of ownership? Let’s say you are in an accident that totals the car. The insurance policy pays you what the vehicle is worth at the time of the accident. That is the car's actual cash value.
What you may not realize is that vehicles depreciate in value very quickly. During that first 12 months, the value may fall 25 percent or more. That means your auto insurance may pay you a fraction of what you owe to the lender. That's where a problem arises.
What Happens Then?
In this type of incident, the car insurance sends you a check, or one to the vehicle lender, for the value of the car at the time of the accident. The lender then requires you to continue to make payments on what you owe. That could still be several thousand dollars, depending on what you owe. In short, you no longer have a car and you still have to pay off the debt.
Gap Insurance Saves You Money
On the other hand, gap insurance provides a solution:
- The insurance payment goes to the lender as stated.
- Then, your gap insurance kicks in. It helps to cover the rest of the debt you owe, up to the amount of coverage you purchase.
- Now, you don’t owe your lender anything.
- You can also likely afford to buy a new car.
- Your credit remains protected.
Gap insurance for new vehicles is an essential investment. It could be a critical purchase for you if you are buying a valuable vehicle that will depreciate in the next year or so.
Also Read: Why Invest in Medical Payment Coverage for Your Commercial Auto Insurance Policy?