Buying a car? Gap coverage and why do you need it.
When you buy a new car you are given many options to choose from regarding financing payment cycle, maintenance options, and warranties etc. Most of these options increase the amount you are paying for the car. So without knowing about these options and of the importance, maybe you are likely to just pass and say no. However one option many people do not know about, is Gap coverage.
What it is.
Gap coverage that will supplement auto insurance when a car is totaled. This coverage does increase the amount of your loan payment. The actual amount for Gap coverage will depend on the value of the car and your loan terms.
How it works
If your car is totaled, the auto insurance companies are only responsible for the actual value of the vehicle. It does not matter who caused the accident or totaled vehicle. So if your vehicle is totaled and the value is less than what you owe on the loan, you are still responsible for the remainder of the loan. You can roll any of the remaining loan into a new loan for another vehicle, but it will obviously increase the payment for the new vehicle. If you have Gap coverage though, the “gap” between the value of your vehicle and what you actually owe on it can be removed, meaning that your loan will be paid in full even if you owe more than the vehicle’s value.
When you need it
Gap coverage is separate from auto insurance. Even if you have a great auto insurance coverage you should still consider Gap coverage since your auto insurance will only cover the actual value of the vehicle. Consider Gap coverage whether you are buying a new or used vehicle and anytime you are going to be making payments on the vehicle.
When it you may not need a Gap coverage:
- When you are paying cash for a vehicle and will not have payments.
- When you were paying less for the vehicle than what it is worth.
- When the value of the vehicle is likely to go up rather than down with time.
Be an informed consumer when you purchase a car from a dealership, they may not explain what all the options are in order to not deter you from buying the vehicle. Getting Gap coverage is important – I have seen too many people end up paying on a car long after it was totaled and they did not have it any longer. Paying $10 or $20 extra a month may be worth it for the peace of mind that if something happens you will not end up paying in the end.