Authored By: Randall Hart
If you have taken a loan to buy a new vehicle, you may need GAP insurance. GAP insurance pays for the difference between the market value of your car at the time of its loss (totaled or stolen) and the balance you owe on the loan. GAP insurance is also applicable to a lease on which you owe, rather than a loan.
When you buy a new vehicle, it begins to depreciate- lose value- the minute you drive it off the lot. A vehicle may depreciate 20-30% in the first year alone. After the first year, the vehicle’s value will continue to fall. Currently, the average depreciation rate (lost value) is about 18% per year. What you owe on the car- the loan or lease balance- does not fall this fast. That leaves a “gap” between what the vehicle is worth on the market and what you owe. This is commonly referred to as being “upside down.” If you are “upside down” when your vehicle is totaled or stolen, standard auto coverage pays only what the car is worth on the market when the loss occurs. If you owe more on your vehicle than what the vehicle is worth, GAP insurance bails you out of this jam and covers the difference.
If you have paid less than 20% down on a new vehicle or have the vehicle financed for five years or more, you may need GAP coverage. Adding GAP coverage to an auto insurance policy is typically the best buy, but not all car insurance companies provide GAP insurance. Lenders may offer GAP coverage for a flat fee, but this is probably the most expensive way to buy GAP coverage. If your auto insurer does not offer GAP coverage, you can probably purchase stand-alone GAP coverage online that are more affordable than what the auto dealer or lender will charge.