You walk to the lot looking for a suitable car for your trip, a used one if you can get your hands on it. But on the way to look at the 40-mpg economy hatchback, the salesman notices his gaze drift to that big, beautiful German luxury sedan. he says, “I know you had your heart set on the hatchback, but this month we’re running a special offer. I can put you in that bad boy today for zero at 2.9% april. you know you want to take a test drive. Come on, let’s do it.” Next thing you know, you have a $65,000 car with a $900 monthly payment.
The only problem (besides the huge car payment) is that as soon as you get the keys and pull the car out of the lot, it’s now only worth $55,000. if you have an accident and destroy the car, you will have to pay that extra $10,000. That’s where a little thing called gap insurance comes into play.
Reading: When does gap insurance kick in
So how does gap insurance work?
We’ll tell you what it is and why, if you follow our advice, you should never need it.
let’s dive in!
what is differential insurance?
Guaranteed asset protection, also known by its acronym, gap, is insurance that covers the difference between the actual cash value of the vehicle and what you still owe on the loan.
In other words, if you finance or lease a car and it is wrecked or stolen before you can pay what you owe, gap insurance covers the difference between the value of your car on a used car lot and the amount you must pay. I still owe.
how does gap insurance work?
The best way to explain how gap insurance works is to give you some examples of situations where gap insurance can be useful.
- if you rent your car. (don’t rent a car!)
- if you finance your car with less than 20% down. (Don’t finance a car loan whether you have a down payment or not.)
- if the term of your loan is greater than 60 months. that’s five years, ouch!
- if you finance a car that depreciates faster than the average car. think big, luxury sedans. but most cars lose 60% of their value in the first five years.1
- car payments if you lose your job or become disabled
- vehicle repairs
- car rental while your car is in the shop
- extended warranties
Now, full disclosure: If you haven’t realized the above, we’ll always tell you to buy your car with cash. We hate debt and would never recommend getting into any of these scenarios.
But if you had to finance a car and, heaven forbid, you were in an accident and your new trip totaled $22,000, your insurance company will pay you the book value of your car. Let’s say your insurer pays you $15,000. but you still owe about $22,000 because you made the foolish decision to finance a car.
So the difference is $22,000 minus $15,000, which is $7,000. If you have gap insurance, your insurance covers that gap so you can repay the loan. here is a picture:
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current loan balance
actual cash value
difference (the gap)
(Note: You can also expect to pay your deductible. Sometimes differential insurance will refund your deductible and sometimes it won’t. You’ll need to check your policy.)
what does gap insurance cover?
Remember, gap insurance covers the gap between the value of your car and how much you owe in the event of a total loss or theft.
It doesn’t matter how your car is destroyed. If your insurance company deems the car a total loss, your gap insurance will kick in after your insurer writes you a check for the actual cash value (ACV) of the car. (How stroke is discovered is a mystery, but you can do your own research using sites like Kelley Blue Book.)
For example, differential insurance would come into play if your car were affected by:
To learn more about how comprehensive and collision insurance work alongside gap insurance, we recommend reading our article on what gap insurance covers.
what does gap insurance not cover?
what does gap insurance not cover? well, frankly, a lot! And that creates a lot of confusion. Here are some of the things gap insurance won’t cover:
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gap insurance does not cover any of these things. In fact, gap insurance literally only covers the difference between what your auto insurance will pay and what you owe on the loan, nothing more.
how much does gap insurance cost?
Let’s talk dollars and cents. There are two places you can buy gap insurance: from the finance company at the dealership and from your regular auto insurance provider.
If you buy at the point of sale, either at the dealership or the bank that finances your loan, it’s usually outrageously expensive, paying a lump sum of $500-700.2
That cost is actually added to your loan amount, which means you’ll also be charged interest on what you paid for gap insurance. therefore, do not purchase differential insurance from the dealer or bank.
If you already have an auto loan you can’t get out of, it’s much smarter to get gap coverage through whatever provider is already insuring your vehicle. The good news about gap coverage is that you can cancel it at any time, and you should do so at the time your loan balance matches the value of your car. Check your coverage with an independent insurance agent to see if gap insurance is included and if you still need it.
Most auto insurance policies add about $20 to your annual premium to include differential insurance.3 An agent can also check the rest of your policy to make sure you have the coverage you need at the best price.
Do you want to know if you have the right car insurance? Download our free car guide today! And if you’re looking for other ways to save on car insurance, check out these tips.
is gap insurance worth it?
Here’s the thing: Gap insurance essentially protects the debt you still owe on your car. cue the eye roll.
So, is gap insurance worth it? If you owe a lot more than your car is worth, it’s probably okay to keep the gap insurance until it’s no longer upside down. If you have gap insurance, it means you will be reimbursed for the difference between the value of your car and what you still owe if your car is totaled. and if you don’t have it, then you are responsible for paying the bill for the difference.
Remember: Debt is silly and we don’t want you drowning in car payments. It’s best to pay cash for your car and let your basic collision and comprehensive insurance protect you if you ever need to replace your car.
get an insurance checkup today
Gap insurance aside, if you’re curious about your coverage in general or just want to shop around for a better rate, our local Independent Insurance Backed Providers (ELPS) are trusted. they can sit down with you and review all of your auto insurance needs for multiple vehicles. our elps can help you find the best coverage and rates for your situation.
Find your independent auto insurance agent today!
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