If you have collision or comprehensive coverage, your car insurance company will pay the value of your car in a total loss settlement, not what you owe on a car loan or lease. But if you owe more on your car than what it\u2019s worth, gap insurance can help fill the difference.<\/p>
\u201cGap\u201d is an insurance industry acronym for \u201cguaranteed auto protection.\u201d When you buy or lease a new car or truck, the vehicle starts to depreciate in value the moment it leaves the car lot. In fact, most cars lose 20% of their value within a year. Standard auto insurance policies cover the depreciated value of a car \u2014 in other words, a standard policy pays the current market value of the vehicle at the time of a claim.<\/p>
If, when you finance the purchase of a new car and put down only a small deposit, in the early years of the vehicle’s ownership the amount of the loan may exceed the market value of the vehicle itself.<\/p>
In the event of an accident in which you’ve badly damaged or totaled your car, gap insurance covers the difference between what a vehicle is currently worth (which your standard insurance will pay) and the amount you actually owe on it.<\/p>
Gap insurance is a type of auto insurance that you can purchase to protect yourself in case you total your car and the amount of compensation you receive does not fully cover the amount you owe on your financing or lease agreement. It reimburses a car owner when the payment for a total loss is less than the outstanding loan or lease balance. <\/p>
Gap insurance covers the difference between the depreciated value of the car and the loan amount owed if the car is involved in an accident.<\/p>
If your car is totaled, your car insurance company will reimburse you based on the current value of the car after this depreciation\u2014not the price you paid for it, the cost of a new one, or the amount you still owe on your loan or lease agreement. That’s where gap insurance comes in.<\/p>
For example, say you bought your car two years ago and owe $20,000 on your financing agreement. However, due to depreciation, your car’s actual cash value is $15,000. If your car is completely written off as a result of an accident or theft, your car insurance policy will pay out $15,000. You can put that $15,000 toward your car loan, but you’ll be $5,000 short of what you owe, even though you no longer have a car.<\/p>
If you have gap insurance, it would cover the $5,000 “gap,” or the difference between the money you receive from the reimbursement and the amount you still owe on the car.<\/p>
You purchased a new car with a sticker price of $28,000 with 10% down, bringing your loan cost to $25,200. With a five-year auto loan and a 0 percent new-car financing deal, your monthly payment is $420. After 12 months, you\u2019ve paid $5,040. You still owe $20,160.<\/p>
At one year, the car is totaled in an accident, and the insurance company calculates the current value of the vehicle. Like the average car, your car is now worth 20% less than you paid a year ago. That\u2019s $22,400. Your coverage will reimburse you enough to cover the outstanding balance on your car loan and leave you $2,240 to put down on a replacement vehicle.<\/p>
But what if your car was one of the models that don\u2019t hold their value as well? If your car depreciated by 30% since you purchased it, your insurance check will be $19,600. You owe your lender $560, and gap insurance is needed.<\/p>