Do you have GAP insurance? Don’t be alarmed if you have never heard of this term. Not many people ever think about gap insurance or even understand what gap insurance is for. So what is Gap insurance? GAP or Guaranteed Auto Protection insurance protects the difference between what you owe on your automobile and what the value an insurance company will give you for your vehicle. Look at it this way. Say you buy a car and you car is stolen tomorrow, but never found. You may owe $15,000 on the vehicle, but an insurance company may say the value is only worth $13,000. You are still going to be in the hole by $2,000. This could put a financial strain on the next purchase to replace the old car. Now you will either have two payments, or have to take money from another account to pay off the auto loan for a vehicle your don’t even own.
Another example would be a major automobile accident. The insurance company has the option or the right to decide if they want to repair your vehicle or consider it a total loss. If the repair will cost more than the value of the vehicle, they will total the vehicle and give you cash based on the value, not the loan. On the other hand, if it is cheaper to repair the vehicle, they will repair it, unless there is a safety issue. Then the insurance company will total the vehicle.
As we all know, your vehicle depreciates the fastest in the first two to three years. While in the first two to three years, you will still have a substantial loan on the vehicle, especially if you made a very small down payment. If the vehicle is totaled, you still have to pay off the bank or company you received the loan from.
All this is where GAP insurance can play a big role in protecting you. GAP insurance will pay the difference between what an automobile insurance company will give you and what you owe on the loan. You won’t have to worry about taking money from your retirement or savings to make up the difference. In addition you will be able to start fresh with a new vehicle and still only have one payment instead of two.
As you can see GAP insurance can be very important for a new vehicle or a vehicle where the loan is more than the value. Keep a watch on the value of your vehicle and what you owe on the vehicle. Once they are close to being the same, you can drop your gap insurance. Remember GAP insurance is not a substitute for auto insurance.