If you are involved in a car accident that requires extensive repairs, your auto insurance company may not be able to recover the cost of any depreciation of the vehicle. If you purchase a used car with a car loan, your insurance company will only pay you for the actual cash value of the car when it is totaled. This means that you will still be responsible for making payments on the original car loan, and you could end up paying hundreds or thousands more for a car that no longer has the same value.
Gap insurance will provide coverage on a leased vehicle when traditional auto insurance won’t. Here’s what you need to know about gap insurance:
How Gap Insurance Works
Gap insurance is designed to “close the gap” between what the insurance company will pay if your car is stolen or totaled, and the amount you still owe to your car loan provider. For example, if the insurance company assesses your vehicle after a serious car accident and finds that your car has lost about 20 percent of its value since the time you bought it, they will reimburse you for this amount.
You will now be responsible for the difference between the loan amount and the reimbursed amount – the gap. Gap insurance will cover the difference so you won’t be left to cover the cost of depreciation on your own.
Reasons to Get Gap Insurance for Used Car
Some insurance companies will extend a gap policy to you during the lease term, but most people will purchase gap insurance when they sign the lease. You will need to carry collision and comprehensive insurance in order to qualify for gap insurance coverage. Some of the key reasons to get gap insurance for your used car include the following:
– You’re purchasing a used car that has a high depreciation rate.
– Your used car is less than two or three years old.
– You made a very small down payment .
It’s important to remember that you do not need gap insurance if you purchased your used car with cash. Gap insurance is designed to protect you from the loss of funds from the insurance company reimbursement and the amount you still owe on a car loan. Before you buy additional gap coverage, make sure that you don’t already have it as part of the lease payment plan.
Gap insurance can be an attractive investment when you are purchasing a used car that is less than a few years old and has a high depreciation value. If you’ve already made a large down payment that covers most of the costs of depreciation, you may not even need this extra insurance protection. Consider all of the potential scenarios and calculate the true value of your vehicle so that you can make the most informed decisions.