When you are buying a car – new or used – the car dealership often asks you whether you want to purchase Gap insurance.
You may not even know what Gap insurance even is. Continue reading to learn more about GAP insurance, as this is a very critical financial decision.
What is Gap Insurance?
Gap insurance can be helpful in many ways. Like many other insurance policies you have, Gap insurance is designed to protect you financially.
In case of a total loss, Gap insurance covers the difference between what you owe on your car and the car’s current fair market value.
Gap insurance is not just for people who are buying a new car. Individuals who are buying a used car can also benefit from the insurance policy. If you already own a used car, you can check with your car insurance provider to see if they offer any options. A car owner can protect their hard earned money with a Gap insurance policy. Especially if the car is is totaled.
Purchasing GAP insurance is also often recommended for people who will be leasing their cars. When you lease a car, you often don’t have many other options for coverage if the car is totaled.
Should you buy Gap Insurance?
The answer is often yes!
The best way to explain it is to use an example. Let’s say you owe $30,000 on your car loan, and the fair market value of your car is $24,000. If you get into an accident where you car is totaled, Gap insurance is designed to cover the negative difference and pay off the remaining $6,000 you would otherwise owe on your car. There are some limitations as to how much the insurance will cover, so be sure to know what those limitations are.
Without Gap insurance, you would essentially have to pay the $6,000 out-of-pocket yourself.
What about my car insurance?
Your car insurance typically only covers the fair market value of your car. In other words, the fair market value of your car before an accident that resulted in your car being a total loss.
Also, if car insurance covered above and beyond your fair market value of your car, then there wouldn’t be a need for Gap insurance.
Gap insurance protects your financial assets! In the scenario where your car is determined to be a total loss and the fair market value of your car is less than the amount you owe to the bank, Gap insurance will cover the difference (up to the limits covered under the insurance policy).
David is an avid car enthusiast. Whether it is classic muscle cars or electric vehicles, David loves everything about cars. Over the years David has bought and sold many cars, as a consumer, and take an active interest in car repair. Outside of cars, David loves to regularly bike to stay active!