Understanding Gap Insurance and your Auto Loan

My mother in law went to get into her car after a long day at work but her car wasn’t there. Someone had stolen it. After the calls to the police and the insurance company she started to worry. “Do I have enough insurance to pay off the car?” I told her if she bought Gap insurance she is covered no matter what she owes. Her next question was one I hear quite often as a licensed insurance professional. “What is Gap insurance?”

Gap insurance covers the gap between what you owe for the car and what the car is worth up to a certain percent, usually 150%. A lot of people think if they have comprehensive and collision coverage sometimes known as “full coverage” that their loan would automatically be paid off if their car was stolen or totaled. They are wrong. Those coverages pay only what the car is worth not what you owe. If your loan is more than the car is worth you would have to pay the difference out of your pocket.

Do you need Gap Insurance? Well that depends on a few things. You’ve heard it many times, once you drive your new car off the lot it starts depreciating. Just remember your loan doesn’t. If you put enough money down that you don’t owe more than the car is worth, you don’t need Gap Insurance. If you had a trade in that wasn’t paid off, or if you didn’t
put much down you probably do need Gap Insurance.

Sometimes the dealerships will offer you this coverage when they are working on your financing. Usually it is a lot cheaper to get it through your insurance company. Plus, you only need the coverage for a few years until you’ve paid down your loan. So why finance it for 5 or 6 years? Some banks even include free Gap Insurance when you finance your car through them. It never hurts to ask.

Do your homework before driving off the lot. There are websites like Kelley Blue Book http://www.kbb.com that can let you know how much your car is worth. Make sure you go back and check every year to find out the value of your vehicle and compare it to what you owe. Once you’ve paid the loan down, be sure to cancel the coverage.

You might think you don’t need it because Gap Insurance only benefits the lender. After all, they will be the ones who get the check if the car is totaled or stolen. However if you don’t have the coverage, you will have to pay the loan off regardless of what the insurance company
pays you for the vehicle. And no one wants to be making a car payment for a car they don’t have anymore.

Having Gap insurance can save you thousands of dollars depending on what you owe for your car. It is usually inexpensive but call your insurance agent to find out exactly how much it will be. Luckily, my mother in law did have the extra Gap insurance so she was able to get a brand new car. This one has an alarm though just in case.