What Is Gap Insurance and How Does It Protect You?
Insurance can be complicated and difficult to understand. We borrowed some tips from the experts at Middletown Honda to talk about an important type of it: gap insurance. Insurance should protect you and cover you in the case of an accident, but sometimes it just doesn’t get the whole job done. Gap insurance is what can pick up the slack that your other insurance policy leaves you in a lurch with the finance company. If you’re still making payments on a car, whether you were buying or leasing, you may owe more than an insurance policy will cover. That’s exactly what gap insurance is designed to protect you against.
Why Is There A Gap?
The gap between an insurance payout for an unfortunate accident and the amount you owe is created by what’s referred to as initial depreciation. While it’s not necessarily true that as soon as a car drives off the lot it loses half it’s value, buying a car is about the single biggest thing that can lower a vehicle’s value. Say you purchased a new vehicle for $25,000 and a few weeks later your vehicle is stolen. Your insurance company pays you the full value of the vehicle at the time, which is $21,000. Your lease or purchase agreement had a monthly payment of $300 and you were not required to put any money down. That means you still owe the financing company a grand total of $3,400 and you don’t have a car. Gap insurance is for covering that value that disappeared because of depreciation.
When Do I Need It?
Leases almost always obligate the leaser to have gap insurance, and most of the time gap insurance isn’t any good without appropriate collision, liability and comprehensive insurance. Gap insurance protects the dealership, the financer, and the leaser in the case of an accident. If you’re purchasing a car instead of leasing you need gap insurance when you owe more than your vehicle is worth; if you don’t have it and something should happen to your car you end up owing the bank money on a car that you don’t have.
Paying more for insurance may seem like a burden right now, but it can really come through for you when you’re in need. We strongly recommend that you consider gap insurance when buying your next car.