What Is Gap Insurance and Do I Need It?
How much do you still owe on your car? If you’re like most people, the figure might amount to a lot more than your vehicle is worth. While that fact might bother you on an intellectual level, it’s nothing compared to the pain you’ll feel if your car ever winds up totaled. That’s when gap (GAP stands for Guaranteed Asset Protection) insurance comes to the rescue, serving as your remedy for making up the difference.
Who Benefits from Gap Insurance?
Although most people think of it as a type of insurance coverage, gap protection actually serves as a debt cancellation mechanism. It exists for one reason only: to pay off the difference between your vehicle’s market value and the amount that remains on your loan. That is extent of your negative equity, and whether you lease or purchase your car, it’s bound to put you at risk.
Many drivers believe that their standard auto insurance policies will routinely provide them with sufficient protection. However, unless it includes gap protection, no plain-vanilla coverage will ever pay more than your car’s monetary worth as it stood just before you incurred the damage. All cars depreciate the moment they leave the dealership. If a tractor-trailer T-bones you before you make it back home, you could already be at a disadvantage. To know for sure, however, it’s important to understand the ways in which a car depreciates.
How Negative Equity Comes to Pass
Any number of things can leave a borrower owing more on a loan than his vehicle is worth. This upside-down situation will routinely result from:
- Depreciation. Although all cars decline in value with age, some deteriorate at a faster clip. After just three months, yours might already have lost up to 30 percent of its original worth.
- Having acquired an extended-term loan. Although it has the benefit of lower monthly payments, any long-term finance agreement will slow the pace at which you build equity in your vehicle.
- Making a small down payment. This tactic could put you at a serious financial disadvantage the minute you drive your vehicle off the lot.
- Borrowing more than the car’s purchase price. People who opt for the dubious benefits of service plans and extended warranties or choose to add the price of license, registration and tax to their total loan amount are by definition in negative equity even before they’ve driven the car off the lot.
Closing the Dreaded Equity Gap
Some people never require gap protection. This could be true for you if you never expect to owe the finance company more than your car is worth. A little research combined with the help of an online auto loan calculator can help you make that determination. The proper tools will enable you to compare the balance on your loan to the equity you’ve built up in your vehicle.
Buying Gap Insurance
If you have already paid off your car, you won’t need gap insurance. When you do, however, there are several means by which to get it. These include:
- Your finance company. Some car buyers choose to purchase this protection directly from the lender.
- Your car dealer. This is normally the most expensive option. Obtaining gap insurance at the dealership will usually entail a one-time charge of several hundred dollars.
- Your insurance company. When purchased in this manner, your payments will consist of small additions to your regular premium amount.
Not all gap protection is created equal. Some cost less while others offer more. Do yourself a favor and take the time you need to shop around.
Don’t Make These Gap Insurance Mistakes
When you’re in the market for gap protection, you need to be aware of certain potential pitfalls. For one thing, buying from the dealership may not be wise, as dealers commonly charge more for this coverage than you might pay elsewhere. In addition, you’ll want to ensure that the protection you purchase will meet your needs over a wide range of situations. Accidents are not the only risk. Thefts and natural disasters can result in the loss of your vehicle at a time when you least expect it.
With gap insurance as with anything else, it pays to do your due diligence. Unfortunately, not everyone has the time or energy required to ferret out the most appropriate deal. At All Kinds of Insurance, we do the legwork for you, making sure that your gap protection meets your needs while costing no more than your situation requires. Don’t get caught short. Call All Kinds of Insurance today at 702-534-4697 to add gap insurance to your auto insurance policy and put your negative equity worries to rest.