What Is Gap Insurance on Your Car and Why You Need It

What Is Gap Insurance On Your Car?

What is gap insurance? And, do you need it? Gap insurance is a type of car insurance policy that is designed to cover the gap between what the value of your car actually is, and what you owe on the vehicle, in cases where the vehicle is totaled in an accident.

Depending on the type of car insurance you have, the insurance company may not cover the full value of the loan in certain cases. This is where gap insurance comes into play.

How Gap Insurance Works

Gap insurance is designed to help those who put low down payments on a car, or for other reasons, do not have a lot of equity in the vehicle. In cases where the primary car insurance company must pay for the value of the car such as a wreck where the vehicle is totaled, the value paid by the company for the vehicle may not cover the loan amount.

Gap insurance is an insurance policy designed to fill this gap and sometimes even pay for the deductible required by the insurance company. In fact, some financing companies even require gap coverage if there was a low down payment, to ensure that they will be covered for the loan value.
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Where to Get Gap Coverage

There are two main ways that gap coverage is sold. First, it is through your primary car insurance company. Gap insurance sold by your auto insurance company is regulated by the insurance board of your state and has specific requirements about what can and cannot be done. Some car loan companies require gap coverage as part of the agreement to ensure that they will be paid back for the loan amount that they let you borrow.

The second way that gap coverage is sold is through the dealer where the vehicle is purchased. Many finance managers try to sell this product when closing a loan at the end of a car sales transaction. This coverage is then financed along with your loan or lease, and all is rolled up into one sales contract.

This industry is less regulated than the car insurance industry run by the insurance companies. Gap insurance sold by the car company and their financing arm are more of an “add-on” upsell than a standard insurance policy.

Do you need gap insurance for your car loan? Maybe you do and maybe you don’t need it. You may be better off simply having a fully funded emergency fund that could pay the difference should the unfortunate incident happen and you total your car while it is upside down financially.

What Is Gap Insurance On Your Car And Why You Need It

8 thoughts on “What Is Gap Insurance on Your Car and Why You Need It”

  1. I had heard of gap insurance, but never really knew what it was. So thanks for this little lesson Hank. So I guess this would be something you’d want to stop paying for once the amount you owe catches up to the current value of the vehicle. I’m pretty sure I didn’t have to pay for this kind of thing with my last auto loan.

  2. If one has a nice new vehicle, this is important. I didn’t want to confront an issue where I totaled a car and then had to come up with a few thousand dollars to pay off the loan. Very important.

  3. My husband is a finance manager at a Toyota dealership, so he spends a lot of time explaining what it is, as many people don’t know. Some opt to go for it through the dealership and others don’t

  4. I learned about gap insurance from Judge Judy’s show. Ok I am going to stop there. 🙂

  5. I have not tried this gap insurance. For someone who has really nice car and can afford an additional insurance- then take it! Insurance gives you protection and peace of mind.

    One important thing, gap insurance is never part of the requirements to qualify for a car loan. Never believe anyone who tries to sell it like it’s an absolute must. But of course, getting a gap insurance could be the right decision.

  6. Thanks for the nice overview on gap insurance. I think it is a great risk management tool for new car owners. The average new car depreciates 30% the first year and about 50% by the third year, so having gap insurance is a great way to fill the “gap” between the drop in value of your new car and likely higher value of your loan.

  7. make sure you check with your insurance company before you sign the papers on a new lease or purchase. My insurance company added gap insurance 100% for a fraction that toyota wanted to charge me..Now it’s turned into a big hassle..


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