Do you know how much money you could lose if you wreck your car or someone steals it? If the value of your car is less than the amount you still owe on your auto loan, your auto insurance policy might not cover everything you need. Gap insurance is meant to cover the difference between how much your car was worth when you lost it and how much you still owe on your car loan.
It's also known as Negative Equity. You probably didn't buy a car with the idea that you'd still have to pay off the loan every month even though you no longer have the car.
Let's say you lost your car one year after you bought it in a hurricane or other disaster: Now, let's say you still owe $20,000 on your car loan and your deductible is $500. Let's also say that when you lost your car, it was worth $15,000. You get $14,500 from the insurance company. Then your "Gap" or "negative equity" is $5,500.
Gap Protection is not really insurance; it's an agreement to get rid of debt. You could call it a waiver of the part of your auto loan contract that says you have to pay the difference between how much your car is worth and how much you still owe on it. Some states do consider Gap Protection to be a type of insurance, but most do not.
Do you need Gap Protection? Talk to the person who might give you a loan for your car. Gap Protection may be needed by people who buy cars with little or no down payment. You may need the extra protection if you are putting the balances of old car loans into your new loan or if you are getting a longer loan, like one for 60 months. Gap Protection is for people who will owe more on their car than it is worth.
You have to figure out how much the car you want to buy is likely to lose value and how fast your auto loan is paying off. This will help you figure out how big and long the gap will be.
For their own safety, some lenders or leasing companies put the coverage in the contract. This is often written into lease agreements. It is easy to decide to buy gap coverage. It's much harder to decide who to buy it from.
You can get Gap Coverage for your car loan from your Credit Union or another lender, from online sellers of gap coverage, or from your car insurance company. Each choice is different, so keep reading before you choose.
It's easy to look into these choices on the Internet. You can use "gap protection" or "auto loan gap coverage" as search terms on your favourite search engine, like Google or Yahoo. Before you give your credit card information to a company you found on the Internet, make sure you check them out. You don't want to end up with a car loan company that won't be there for you if something goes wrong.
Your Auto Insurance Carrier: Not all insurance companies offer car loan gap protection. See what your agent says. Check to see if your car loan already has gap coverage and, if so, how much coverage you have. You might want more than they can give you. The cost of gap insurance is based on how much your car is worth. The higher the cost of the car and the more coverage you need, the more it will cost.
Also, remembering this is very important. Your insurance company or another provider will keep sending you bills every month for gap coverage. You have to figure out and decide for yourself when you no longer need it. In other words, you need to know when you will get out of the hole. You need to know when the difference between how much you still owe on your car loan and how much your car is worth.
Gap insurance can also be bought from the car dealer or the person who gave you the loan for your car. This is done when you get your car loan, so if you choose this option, bring it up right away. Some lenders may let you buy it later, but it's best to buy it at the same time you get your loan. The car is a used car as soon as you drive it off the lot.
The cost is usually a one-time fee that is usually the same for everyone who buys the same policy. The buyer can add the fee to the total amount of the loan and pay for it each month. Most of the time, the best rate for gap insurance is not at a dealership. You might want to choose something else. Gap protection from car dealers costs about $500 on average. You might be able to get the same protection for your car loan for as little as $250 from your credit union or bank.
Make sure that the deductible is also covered by your gap insurance. Look for other features, like money for a new car or a replacement car if something happens. So don't choose who to buy gap protection from based on price alone.
