Gap Insurance covers the difference between what you owe on a car and what it is actually worth, should you experience a total loss.

Gap Insurance covers the difference between what you owe on a car and what it is actually worth, should you experience a total loss.

What is Gap Insurance and when do you need it?

When you purchase or lease a new vehicle, it depreciates the moment you drive it off the car lot. If you’re putting a very small down payment on your new car, buying on credit, or taking a loan for longer than four years, chances are you will want Gap Insurance.

If you drive more than 15,000 miles a year, you probably will need Gap Insurance, as cars with high mileage tend to depreciate more quickly. You also may need to purchase Gap Insurance if you are leasing your car.

Let’s say you purchased a new car, and only put down a small amount based on a “special offer” by the car dealership.

As soon as you drove it off the lot, it depreciated. In fact, in the first month, your new car will depreciate 10%. By the end of the first year, your car will have depreciated 20%, according to Carfax. And it will continue to depreciate at a rate of about 10% a year for the next four years.

A standard auto insurance policy only covers the car’s worth at the time of a claim. Gap Insurance comes into play if your car is totaled in an accident or stolen during that “gap” time period where you owe more than the car is worth. Without Gap Insurance, you would find yourself owing money on a loan for a car you no longer have the use of.

If you’re trying to figure out if you need Gap Insurance, check to see what your car is worth in Edmunds or Kelley Blue Book, then look up how much you still owe on your loan.

Where should you purchase Gap Insurance?

The best way to purchase Gap Insurance is to add it to your auto insurance policy. You’ll only need it for the time period where the car is worth less than what you owe.

If you were to purchase it from the car dealership, they would roll it into the length of the loan, which means you’d be paying for it for longer than you’d need to be, and you’d be paying interest on it as well.  Additionally, rates are likely to be higher when you purchase from the car dealership.

When do you no longer need Gap Insurance?

If you own your car, your car is worth more than your loan, your loan is for a short period of time (under 12 months), or you wouldn’t need to replace the car or you have the ability to pay off the loan in the event of a total loss, you don’t need Gap Insurance.

Gap Insurance will help you avoid a financial hit should you experience a total loss while your car loan is underwater. However, make sure you’re aware when the “gap” is no longer, so you’re not paying for Gap Insurance beyond the time frame you need it.

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