Gap Insurance: Do You Need It?

 

When you buy a new car, its value depreciates quickly, often faster than the rate at which you pay off your car loan. If your vehicle is totaled or stolen, your standard auto insurance policy will only cover the actual cash value of the car, which may be less than what you owe on your loan. This is where gap insurance comes in.

What Is Gap Insurance?

Gap insurance covers the difference between the amount your insurance company pays and the balance of your car loan or lease in the event of a total loss or theft.

Example of How Gap Insurance Works:

1. Car Loan Amount: $25,000
2. Vehicle’s Current Value (Insurance Payout): $20,000
3. Gap: $5,000

Without gap insurance, you would be responsible for paying the $5,000 difference out of pocket. With gap insurance, that amount is covered, saving you from financial loss.

Do You Need Gap Insurance?

You should consider gap insurance if:

• You have a significant loan balance that is higher than the current market value of your car.
• You made a small down payment when buying your car.
• Your car depreciates quickly (new or luxury vehicles).
• You have a lease agreement that requires gap insurance.

When You May Not Need Gap Insurance:

• If you paid for your car in full or owe less than the car’s current value.
• If your loan balance has decreased to a point where it’s close to or below the car's value.