What is gap insurance coverage?
When you lease a vehicle, you are actually borrowing it from the dealership for a set amount of time. When you finance a vehicle, you don’t actually own it until the very last payment has been made and the title is in your hands. Even though we may tell people that it is our car, it technically does not belong to us in these scenarios.
So, what happens when you get into a car accident and total the car? Your car insurance should kick in and cover the cost of the damages or give you a check for what they believe the car is worth if the cost of repairing it exceeds its value. The danger in this situation is that the amount the car insurance company gives you may not be enough to cover what you owe on the car. This could leave you in a bind where you are still paying for a vehicle that you can no longer drive.
How can you protect yourself from having this problem? You purchase gap insurance. Gap insurance is just what it sounds like. It is insurance to assist you with that gap of money between what regular insurance is willing to pay and what you owe a financing institution.
What does GAP insurance cover?
Understanding the need for gap insurance means understanding the value a vehicle depreciates. Unlike owning a home, which has the potential to grow in value over time, owning a vehicle is different. Vehicles start losing value the second you drive them off the dealership parking lot. In fact, a new vehicle can lose as much as 60% of its value in the first two years of ownership!
How does this relate to gap insurance? Well, if you are financing or leasing the vehicle you have signed a contract with a finance company for a specified amount of money. The financial institution is not going to be concerned about the value of your car at the time of an accident.
They want the contracted amount agreed to by both parties at the time of purchase, plus interest. An insurance company, on the other hand, is not going to pay out more than a car is worth. Even owning the car for a short amount of time could mean that you will be left in a situation where you are paying for transportation that you no can longer drive once it has been totaled or stolen. Gap insurance is your only protection for this situation.