Saving money with gap insurance

Imagine that you took a car loan and bought a shiny brand new vehicle. What happens if it gets into an accident? Even though the car is insured, the amount of payout may not be enough to cover your debt.

There is nothing worse than having to make loan payments on a vehicle that you can’t drive! That's where Gap insurance comes in. It is designed to cover the difference between what you owe to your bank or leasing company and how much the car is worth. Learn more about Gap insurance – how it works, who needs it, and where to buy it.

Gap insurance

A regular auto insurance policy provides enough protection to cover the cost of repairs or replacement if your car is damaged or stolen. However, if the vehicle's actual cash value is lower than the amount you owe the bank or leasing company, that difference, or "gap," is not covered by insurance.

In this case you can take advantage of Gap insurance. It covers what standard auto insurance doesn't: the gap between what your insurance company pays if your car is stolen or totaled for any reason - accident, theft, vandalism, fire, flood, tornado, or hurricane and what you owe on your loan balance or lease.

For example, imagine that you take a car loan (5 years, 6% APR, insurance deductible is $500) and buy a new car for $25,000. You make car loan payments and after one year you owe your bank $20,580. Then you get into an accident and your car is totaled.

Your insurance company will pay you the amount the car is worth (before the accident), not the amount needed to pay off your debt in full. Do you know that a new vehicle may be worth up to 40% less in two years than the day it was purchased? So the adjustor looks into his papers and decides that your car’s actual retail value is only $17,500. Then he subtracts your insurance deductible and – voila! – you get just $17,000.

Unfortunately, your bank still wants you to cover your debt in full - $20,580. There's a gap of $3,580 between your loan balance and the amount of payout you will get. That’s where Gap insurance becomes your helping hand. It covers that difference - up to $50,000-$100,000 per incident. Plus, it can also pay your standard auto insurance deductible.


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