What Is Gap Insurance in Car Insurance?
<lingo>Gap insurance provides financial protection for instances in which your vehicleâ€™s current worth is less than what you owe on a loan for that vehicle. Commonly used when a driver purchases a new car, gap insurance helps reduce the financial risks associated with the rapid depreciation that happens during the first year. With this type of insurance youâ€™ll have coverage, for example, if your vehicle is totaled a few months after you buy it, when its value may not be as much as when you first bought the car. This optional form of car insurance may be important if you are financing your car or leasing it.</lingo>
Gap Insurance Clearly and Briefly Explained
Most new cars depreciate quickly in their first year. That means that the value of the car drops significantly after you buy it over the first 12 to 18 months. Thatâ€™s because the vehicle is no longer brand new, and as a result if you tried to sell it, you couldnâ€™t get the full price you paid for it. Most car insurance policies provide a payment to you in the event of an accident thatâ€™s based on the value of the car right before the incident happened. With a nearly new car, that could mean the insurer doesnâ€™t pay you enough to cover the loan you took to buy it.
<twitter>The value of most new cars drops significantly after you buy it over the first 12 to 18 months.</twitter>
Gap insurance covers that â€œextraâ€. For example, if you buy a vehicle for $25,000, it may depreciate in value to $20,000 during the first year. If you are in an accident a few weeks after buying the car, and the insurance company totals it, your gap insurance can kick in. The insurance company may pay you only $20,000. Gap insurance may pay the rest of what you owe â€“ in this case, $5,000 â€“ to your lender.
Gap insurance is beneficial to those who buy a new car or lease a new vehicle. Itâ€™s an inexpensive way to protect your car from this type of financial loss. If you didnâ€™t have it, you would still be responsible for paying your lender those extra funds. Gap insurance limits that risk to you.