Gap insurance is often misunderstood. Gap coverage, typically referred to as loan/ lease gap insurance could save you from extreme financial difficulties in the future. Additionally, gap insurance is often inexpensive and few claims for gap reimbursement are made and the coverage often goes unused for the entire course of the loan or lease. However, by understanding the benefits of gap insurance, you will be able to make an informed decision about purchasing this type of insurance when you finance or lease your next vehicle.
To understand the benefits of gap insurance, you must first understand what gap insurance is. Gap insurance covers you financially in the event of a total loss of your vehicle. For example, if you total your car, your insurance company will pay off what they consider to be the vehicle’s actual cash value. This cash value amount may not make up the entire amount financed or owed by you. Gap insurance steps in and covers any additional amount still owed. Basically, gap insurance provide 100% payoff of your vehicle finances if the vehicle is totaled. This makes you, the driver, free and clear of additional expenses in the event of a total vehicle loss.
Who needs gap insurance and who can benefit the most from gap insurance? For an understanding of who needs gap insurance, we have to look at vehicle cost, depreciation, down payment, and several other factors. This is easily achieved by providing an example. In the example below, the vehicle represents a typical car with typical financing options.
You purchase a vehicle for $22,000 with a $1,000 down payment and finance the vehicle for 5 years at 6% interest rate bringing your monthly payments to around $375. Likewise, you insure the vehicle with typical comprehensive/ collision coverage with a $500 deductible. One year into ownership of the vehicle, you are involved in a major accident and the car is declared a total loss. Your insurance company submits a check to the finance company for the cash value of the vehicle which they determine to be $15,400. However, you still owe the finance company nearly $17,000. In this situation, gap insurance will step in an pay the finance company the additional $1,600 to covers the rest of the vehicle finances. Without gap coverage, you will be responsible for the $1,600. Additionally, the gap insurance will cover your $500 deductible. In essence, gap insurance will save you $2,100 in this example.
Vehicles depreciate in value the moment they are driven off of the lot. The depreciation can be as high as 30% within the first three months of ownership. Due to depreciation, insurance company will typically offer a cash value that is less than the amount owed on the vehicle. Depreciation is highest during the first three years of ownership and even more so during the first year. It’s highly advisable to carry gap coverage during the first year or two of financing to cover the high rate of depreciation.
Who benefits from gap insurance? Nearly everyone that purchase a vehicle can benefit from this coverage. It’s affordable protection against costly losses. So consider gap coverage next time you finance or lease a vehicle.