When you get a loan or lease for a new car, it is also smart to consider getting coverage for the gap that might exist between what you owe on your vehicle and what it is worth.
The vehicles you purchase or lease are likely some of the most expensive and well-used assets you will own. So, if something serious were to happen to your new car or truck, like a theft or a major collision, then you’re probably going to want to replace it as soon as possible, with as little financial outlay as possible. The best way to make sure this happens is to have the proper car insurance coverage. However, you should also consider adding an important endorsement, called gap insurance. If your vehicle is ever declared a total loss, gap insurance, also known as auto loan/lease gap coverage, can help you pay off the difference between the amount your insurance company reimburses you for your totaled vehicle and what you still owe on your car loan/lease contract.
How does Gap Insurance work?
Since the only time you may need gap insurance is if you experience a major auto loss, the best way for us to show you how this important coverage works is to walk you through how your car insurance company is likely to respond if you total your car or it is stolen.
- You have a covered auto loss that triggers either your collision or comprehensive coverage.
- If your insurance company declares your vehicle a total loss, then it will calculate a payout amount based on the actual cash value of your car. You can think of this as the amount you probably could have sold your car for on the open market before it was totaled or stolen.
- You receive a check from the insurance company that, depending on how much the value of your car has depreciated over the months or years you’ve been driving it, could be significantly less than what you originally paid for your car. The insurance company reimbursement will also reflect any deductible you owe.
Seems fairly simple, right? However, the process of settling your auto loss often does not end there.
At the time of the car accident or theft, if you owe money on your car loan or lease, then you’re still responsible for paying the remaining balance, regardless of the fact that you no longer have the car. In fact, you could easily owe more to your lender than the insurance company has reimbursed you, especially if you have a newer car. If there is a gap between what you owe and what the insurance company paid you, then you’re the one left to make up the difference in dollars.
This is the reason why it can be very beneficial to have gap insurance. With this endorsement in place, your insurance company will typically cover the difference (the gap) between your car’s value and what you still owe on the loan or lease when a major loss occurs.
Austin Insurance can help you determine your need for Gap Insurance and assist you with securing affordable coverage.
If you’re reading up on gap insurance before you head to the dealership to purchase your next new vehicle, that’s good thinking. This coverage will generally be offered to you at the time of your purchase, but there are a couple of cons to buying gap insurance at the dealership. First, you will generally pay considerably more than you would if you purchased this coverage through your local insurance agent. Plus, since the cost of the gap insurance will be added to your car loan/lease balance, you will also pay interest on the coverage premium.
Through Austin Insurance, you can get access to gap insurance for as little as $20–$40 per year, and of course it’s interest-free. In addition, our team takes the time to review your specific loan/lease situation and identify any factors that might make gap insurance a particularly smart idea for you. For example, the following are just some of the questions we will explore with you.
- Will you be making a down payment on your car? If so, will it be 20% or less of the loan amount?
- Are you financing your vehicle for 60 months or longer?
- Are you purchasing a vehicle that depreciates faster than the average?
Depending on what we discover, we can determine how likely it is that you could get “upside down” on your car loan. If your risk is high for owing much more to your lender than your vehicle is worth at the time of an accident or theft, then gap insurance could be well worth the few extra dollars a month.
At Austin Insurance, we never want you to pay one penny more than you need to for your car insurance. At the same time, our team is strongly dedicated to making sure you are carrying the right level of protection to safeguard you against the unexpected. Whether you’ve already purchased a vehicle or are planning to in the near future, the Austin team would be happy to assist you in evaluating your need and eligibility for gap coverage and other valuable and affordable car insurance endorsements.