​What Is Gap Insurance - Coverage

Staff Reporter
Aug. 4, 2014

What is Gap Insurance - It’s known as gap coverage and the insurance includes the difference between the value of the vehicle and what is owed. It also adds protection for the person buying the vehicle and the company financing it.

The coverage also protects you if the car is ever stolen or totaled in an accident while you are still making payments. For buyers, gap only makes sense if you expect to owe more than it is worth. Let’s put a few scenarios together and try to explain more.

Let’s say you buy a new car for $20,000. You put $500 down, and your payments are $350 per month. Six months later, it is involved in an accident and totaled.

Your insurance collision protection determines that your six-month-old automobile is now worth only $16,500. They will pay you that amount (less than your collision deductible if the accident is your fault). You’ve made six monthly payments plus your down payment, for a total of $2,600; you still owe $17,400 on the vehicle.

In a case like this, the coverage would pay the $1,100 difference between what collision insurance covers ($16,500) and what you owe on the car ($17,400). If you did not have gap, the extra $1,100 would come out of your pocket.

If you made a low down payment, if you bought a car that depreciates rapidly, if you have a high interest rate, or if you rolled over other costs, such as money owed on a trade-in, into your payments, the coverage makes sense.

Most buyers, particularly those who made a healthy down payment, will always be right-side-up on the vehicle, and therefore, don’t need gap coverage. However, the insurance coverage is highly recommended to anyone who finances a car.

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