Gap Insurance: A Comprehensive Guide to Understanding its Benefits and Coverage
Gap insurance is an optional car coverage that covers the difference between the actual cash value of a vehicle and the amount you still owe on your loan or lease. The dealer or your insurer usually offers it, typically costing a few hundred pounds annually.
However, it’s not mandatory and should be dropped as soon as you pay off enough of your auto loan to match the fair market value of your vehicle.
If you would like to read more information or learn more about the pricing of business insurance, you can do so here.
What Is Gap Insurance
It pays the difference between the actual cash value of your vehicle and the amount you owe on your loan or lease. Gap insurance can save you money in the long run, especially if you lease your vehicle.
- Typically, you can get gap coverage through your auto insurer instead of the car dealership.
- Generally, this option is cheaper and tends to have better ratings in third-party customer satisfaction reports like J.D. Power. Some popular providers include Nationwide, Progressive, and Travelers. The coverage may be called loan/lease payoff or gap insurance, but the coverage is generally the same.
- Gap insurance aims to ensure you aren’t stuck with an expensive car lease or loan after your car is totalled or stolen.
- Many lenders require gap insurance if your financed vehicle is totalled or stolen.
- GAP insurance pays the difference between what you owe on your loan or lease and the actual cash value of your vehicle.
For example, let’s say you own a brand-new car, and it gets totalled after an accident. Your insurer will only pay you up to the actual cash value of your vehicle, which is the amount it is worth minus depreciation. However, you still owe a large amount on your car loan.
Gap insurance will cover the remaining balance of your loan or lease. This is why many people choose to purchase gap insurance. Car dealerships often sell gap insurance, but it can be more expensive than an insurance agency.
Below is a useful table about popular insurance companies in the UK based on what they offer and their Trustpilot rating:
Gap Insurance Is Not Mandatory
State laws typically don’t require drivers to purchase gap coverage, though it can be required as a condition of financing or leasing a car. It’s often sold by the car dealership or bundled into your lease payments, making it more expensive than purchasing a policy from a car insurance agency.
Still, it may be worth the investment if your vehicle depreciates rapidly or you’ve put a low down payment on your loan or lease. It’s important to note that gap insurance only covers the difference between an insurance company payout and what you owe on your auto loan. It does not cover your deductible or repairs for any other type of damage. You’ll want to consider a comprehensive and collision insurance policy for those reasons.
You’ll also need to consider how much your car is worth in the future, which you can easily find out by consulting Kelley Blue Book or contacting your lender or lessor. Once you’ve paid off enough of the loan or lease that you owe less than your car’s value, you no longer need gap insurance. It’s an extra expense not worth paying if you’re no longer upside down on your loan. You can cancel the policy or ask your lender to waive it. If your lender doesn’t allow you to cancel it, you might be able to purchase it through another agency for a fraction of the cost.
Gap Insurance is a Good Idea
Gap insurance is brilliant, especially for drivers who lease or finance their vehicles. It can be costly to owe more than the vehicle is worth if it’s totalled. Getting gap coverage, also called lease/loan payoff protection, may save them thousands of pounds. Gap coverage is often available at the dealership, but buying through an insurance company can be cheaper. In some states, gap coverage is included in the lease contract. It’s best to ask if that’s the case in your state.
Car values depreciate quickly, especially if you have a loan. Drivers can find themselves upside down on their loans within minutes of driving off the dealership lot. Standard auto insurance will only cover the actual cash value of your car, not what you paid for it or how much you still owe to the lender. GAP insurance, typically inexpensive, helps drivers pay off their loans or leases if their vehicles are stolen or declared total losses.
It’s also a good idea to consider gap coverage when you make a sizeable down payment on a new vehicle and if the car will be subjected to high mileage or frequent trade-ins. For many, it’s a small price for peace of mind. Check with your insurer to see if they offer gap coverage, or ask your dealer if it’s included in your lease contract.
Gap Insurance – To Conclude
Gap insurance can save you thousands of pounds, especially on a bad day. The car dealer may offer it as an add-on to your vehicle purchase, or you can get it from your auto insurance company. However, you should ensure your gap policy is compatible with your other car insurance coverage.
- It must include collision and comprehensive coverage to be effective. Also, if you’re leasing your vehicle, the lease contract may require that you carry full-coverage car insurance.
- You might need gap coverage if you made a small down payment on your car or financed the entire cost of it, significantly if your car depreciates faster than other cars.
- In that case, the amount you owe on your loan or lease can exceed the actual cash value of your vehicle after it’s totalled.
- It’s called being upside down on your loan or lease and can be a financial disaster.
Gap insurance can help you pay off your loan or lease if your car is totalled or stolen. Typically, the insurance company takes about 30 days after your car is declared a total loss to process your gap payment. It’s a good idea to ask your lender or lessor about the process and how long it could take so you know what to expect in the event of an accident. Gap insurance is usually worth it if you don’t want to risk being upside down on your loan or lease. But once you’ve paid off enough of your loan or lease that the car’s value is equal to or lower than what you owe, you don’t need gap coverage and should consider cancelling it if you have it.
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