Gap insurance covers the difference between the value of the car (your standard insurance payout) and the balance of your loan or lease in the event of a total loss (i.e. the car is totaled or stolen). Contrary to popular belief, Gap does not refer to the apparent gap in coverage, it actually stands for “guaranteed asset protection”.
New cars lose some value the second you pull off the lot and then a significant amount within the first year, about 20-30%, according to Black Book.
Gap insurance supplements your comprehensive or collision insurance payout if your car is totaled or stolen. Some gap insurance plans also cover your insurance deductible, which is typically subtracted from your payout.
Let’s say you buy a brand new car and finance $25,000, the full value of the car. Six months later, your car is stolen. Your insurance company pays you the current value of the car, $21,000, however, your current loan balance is $23,000, so you’re $2,000 short. That’s where gap insurance comes in. Your gap insurance will give you the $2,000, so you’re not stuck having to pay for a car you no longer have.
Auto insurers typically charge around $20 a year for gap insurance, according to the Insurance Information Institute. This is typically an add-on to your comprehensive or collision coverage. However, some insurers include gap insurance in their standard coverage, so check with your insurance provider before purchasing another plan.
Lenders usually charge a flat fee of $500 to $700 for gap insurance, according to United Policyholders, a nonprofit consumer group. If you financed your car through a credit union, gap coverage may be cheaper. The downside of having coverage through your lender and adding the coverage to your loan is that you’ll also have to pay interest on it.
You can also purchase standalone gap insurance online, which costs around $200 to $300 as a one time fee.
Adding gap coverage to an auto insurance policy is typically the best bang for your buck. Most people only need coverage for a few years, until the gap between the value of your car and what you owe closes.
Not all car insurance companies provide gap insurance or an equivalent or offer it in all states, so check with your insurance company.
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