When you get involved in an auto accident and your car is under a loan, you might end up spending lots of money for a car that’s not that valuable anymore. Enter GAP insurance, which stands for Guaranteed Auto Protection.
The role of gap insurance is to offer protection for drivers from this exact scenario by acting as sort of a financial bridge between what you owe on your car loan and the estimated fair market value of your car.
How Gap Insurance Works
Gap insurance coverage safeguards you from spending what could be a very huge difference between the current estimated value of your car and the balance of your car loan. It’s fairly common for drivers to think that if their car gets totaled or stolen, their comprehensive and collision insurance policy would cover everything, but this coverage actually only covers the car’s actual cash value, explains Oxford Auto Insurance, a top auto insurance provider in Harvey, Illinois.
The problem is that when you get involved in a car accident, there’s a high chance that your car’s fair market value is significantly lower than what you’re thinking because cars depreciate rapidly. Generally speaking, a car depreciates by 15% to 25% each year and would be valued at about 37% of its purchase price after five years. Once you consider how fast your car could depreciate, it becomes clear how important gap insurance is—it could save you from spending thousands of dollars just because of depreciation.
Should You Buy Gap Insurance?
Whether you’re required or need to have one, the guaranteed auto protection factor would depend on certain things. First, gap insurance is usually a requirement for a car lease contract and is typically included in the agreement. Otherwise, you wouldn’t need it. Likewise, when taking out a car loan, note that if you have a large loan and a small down payment, it’s wise to have gap insurance.
Additionally, if you have a high-end or new car, it’s also a good idea to get gap insurance. Do note though, that there’s a cap on the amount that gap insurance coverage would pay, so be sure to read and understand all the requirements, terms, and conditions before you buy one. As always, shop around and perform due diligence before committing to anything.