Most of us understand that a car loses value once we take it home from the dealership. But many of us are unaware that we can purchase insurance protection for the difference between the car’s cash value and the amount of the car loan.
Even with a full coverage insurance policy, you are not fully protected against loss in the event that your car is totaled in an accident. Instead, you will be paid for the car’s actual depreciated value. This may leave you with a significant difference between the vehicle’s value and the amount left to pay on your car loan. Gap insurance will pay the “gap” amount between those two values on your loan. The policy, which could save you hundreds or even thousands of dollars, may you in the event of theft or accidents.
Sometimes gap insurance is built into a lease. Ford Motor Company’s Red Carpet Lease, for example, builds the cost of the additional protection in your contract. However, with that particular lease, you are required to make payments until the company receives the full payout, including the gap amount.
Loan contracts are not as progressive when it comes to protecting you from the expense gap.
Insurance companies offering gap insurance won’t necessarily notify you of its availability. In fact, some of the major insurance companies don’t offer the protection at all.
If you want gap insurance, make certain to discuss it with your carrier before making the new car purchase. Typically, the protection is not offered at all for pre-owned car purchases or after the new car purchase has been made.
Make sure you ask your carrier detailed questions so you know exactly what coverage you are getting. Not all gap coverage is equal. For example, some carriers have a cap on the payout, while others will exclude finance charges, late fees and mileage charges. Some companies offer a new vehicle replacement plan, which will provide you with a new car, regardless of the cost, if your new car is totaled within ninety days of purchase.
Gap insurance will cost anywhere from two to five percent of the total premium cost of comprehensive and collision coverage. Be aware that if the dealer sells you a policy, it will generally be more expensive than the average insurance carrier.
By Darryl James