Auto Loan Gap Insurance: A Comprehensive Guide
Auto loan gap insurance is an optional coverage that protects you from owing more on your vehicle loan than the car’s actual worth in case of theft or total loss. This type of insurance is especially useful for those who have made a lower down payment, have a longer financing term, or are leasing a vehicle.
What is Gap Insurance?
Gap insurance covers the difference between the actual cash value (ACV) of your vehicle and the outstanding loan balance. For instance, if you owe $25,000 on your loan and your car’s ACV is $20,000, gap insurance will cover the $5,000 difference, minus your deductible.
How Does Gap Insurance Work?
Here’s an example:
– You finance $30,000 for a new car.
– After a few years, your car’s value depreciates to $20,000, but you still owe $25,000 on your loan.
– If your car is totaled, your insurer will pay the ACV ($20,000) minus your deductible.
– With gap insurance, you’ll receive an additional $5,000 to cover the loan balance.
Key Benefits of Gap Insurance
– Protects against depreciation: Vehicles depreciate rapidly, and gap insurance helps cover the difference between the loan balance and the car’s value.
– Covers loan balance: Gap insurance pays off the outstanding loan balance, ensuring you’re not left with debt after a total loss.
– Optional but valuable: Gap insurance is not mandatory, but it can be a valuable safeguard for those who owe more on their loan than the car’s worth.
When to Consider Gap Insurance
– Leasing a vehicle: Lenders may require gap coverage on leased vehicles.
– Lower down payment: If your down payment is less than 20% of the sale price, you may end up with negative equity.
– Longer financing term: The longer your financing term, the higher the chance of owing more on the vehicle than its worth.
– Quick depreciation: Some cars depreciate faster than others, making gap insurance a valuable consideration.
How Much Does Gap Insurance Cost?
The cost of gap insurance varies by insurer, and some providers may offer it as part of their loan/lease payoff coverage. You can get an exact price quote from insurance companies like Progressive.