Gap insurance, or Guaranteed Asset Protection insurance, is a type of insurance that covers the difference between the amount owed on a car loan or lease and the actual cash value of the vehicle in the event of a total loss or theft. In other words, it protects car owners from having to pay out of pocket for the difference between the amount they owe on their car and the amount the insurance company will pay out in the event of a loss.
When you purchase a car, the moment you drive it off the lot, it begins to depreciate in value. If you were to get into an accident or have your car stolen, your insurance company would only pay out the actual cash value of the car at the time of the loss. However, if you financed or leased the car, you may owe more on the vehicle than what it's worth at the time of the loss. This is where gap insurance comes into play.
Gap insurance is usually offered by the dealership or finance company when you purchase or lease a car. However, you can also purchase gap insurance from an insurance company, although it's not available in all states. The cost of gap insurance varies, but it's typically a one-time fee of a few hundred dollars that can be rolled into your car loan or paid upfront.
If you're financing or leasing a car, it's important to consider whether gap insurance is right for you. Here are some things to keep in mind:
- How much do you owe on your car?
The more you owe on your car, the more sense it makes to purchase gap insurance. If you owe more than the car is worth, you could be on the hook for thousands of dollars in the event of a total loss.
- How much does your car depreciate?
Some cars depreciate faster than others. If you're driving a car that's known to depreciate quickly, such as a luxury car or a sports car, it may be worth considering gap insurance.
- How much can you afford to pay out of pocket?
If you can't afford to pay the difference between what you owe on your car and the actual cash value of the car in the event of a loss, gap insurance may be a good idea.
- What does your regular car insurance cover?
It's important to know what your regular car insurance policy covers in the event of a loss. Some policies may already provide some coverage for the difference between what you owe on your car and the actual cash value of the car.
Gap insurance can provide peace of mind and protect you financially in the event of a total loss or theft. However, it's important to weigh the cost of the insurance against the likelihood of needing it.
In addition to gap insurance, there are other types of car insurance that you may want to consider. Here are some of the most common:
- Liability insurance
Liability insurance is required by law in most states. It covers damage or injury that you may cause to other people or their property while driving.
- Collision insurance
Collision insurance covers damage to your car in the event of an accident, regardless of who's at fault.
- Comprehensive insurance
Comprehensive insurance covers damage to your car from non-collision events, such as theft, fire, or natural disasters.
- Uninsured/underinsured motorist insurance
Uninsured/underinsured motorist insurance covers you in the event that you're in an accident with someone who doesn't have enough insurance to cover the damages.
- Personal injury protection
Personal injury protection, or PIP, covers medical expenses and lost wages for you and your passengers in the event of an accident.
When deciding which types of insurance to purchase, it's important to consider your individual needs and budget. If you're financing or leasing a car,