Car gap insurance is one of those expenses that seem like a waste of money until you need it.
In fact, unless you have suffered the total loss of a vehicle through either collision or theft, you may be unfamiliar with car gap insurance and how much it could ultimately save you.
The moment you drive a new vehicle off the dealer lot, your auto insurance is probably inadequate to protect you financially in the case of a total loss.
That's because your regular auto insurance is designed to pay the lender the vehicle's current cash value -- not the current loan balance. The difference can be thousands of dollars. And we all know once your new car -- owned or leased -- leaves the lot, it is considered a used car and the value of it drops significantly.
In fact, the average new vehicle loses 30 percent of its value the first year. By year three, that loss in value will be close to 50 percent, says Philip Reed, senior consumer advice editor at Edmunds.com, an auto data provider.
If your vehicle cost $25,000 new, your insurer would probably pay about $18,000 for a total loss during the first year. That's a $7,000 shortfall. Depending on the amount of your down payment (or trade-in equity), you would still be responsible to your lender for the balance of the loan.
If you have car gap insurance, your insurer pays the difference, not you.
Who should buy it?
If you own your car outright or have a lot of equity in it, you don't need gap insurance.
Bill Pearse, vice president of auto product strategy and design for Travelers Insurance, says "Anybody who has an auto loan or lease and hasn't put a significant amount down should buy car gap insurance."
You're a likely candidate for gap insurance if you:
- Lease a vehicle.
- Finance for 60 months or more.
- Put less than 20 percent down.
- Roll negative equity from a previous vehicle loan into a new vehicle loan.
- Drive more than the average 15,000 miles annually.
- Purchase a vehicle with a history of high depreciation rates.
