Do I Need "Gap" Car Insurance?

If your financed vehicle is deemed a total loss after an accident, gap car insurance can help pay off your car loan.

Cars often serve as collateral for the car loans that helped make their purchase possible. But what happens when a financed car is involved in a crash? When the vehicle is declared a "total loss" after a car accident, you could face a situation where your payout from the insurance company isn't enough to pay off your car loan.

  • Most new cars will lose 20 percent of their value after just one year, according to the Insurance Information Institute.
  • "Gap" car insurance can help pay the difference between your car's actual cash value (ACV) and your remaining car loan balance.
  • A number of key factors should be considered when deciding whether you need gap insurance.

When You Might Need Gap Car Insurance

    If you're still financing a vehicle, you probably want gap car insurance if the actual cash value ACV of your vehicle is less than the remaining balance on your car loan. But car loan details aside, other factors come into play too, including the age of your vehicle and its ownership history. Let's look at an example to illustrate.

    You bought a brand new car, and its ACV is $20,000. However, you still owe $23,000 on the vehicle's car loan. You also have car insurance that covers damage to your own vehicle, with a $500 deductible.

    If you get into a covered car accident that totals your financed vehicle, your car insurance company will pay you $19,500. This is the ACV of your car, less the deductible. Because you still owe $23,000 for your car loan, you'll need to find $3,500 to pay off the vehicle you no longer have.

    (Learn more about vehicle repair options after a car accident.)

    If you have gap car insurance, it'll pay you $3,000. Depending on the type of gap coverage you have, it might also pay you an extra $500 for the deductible.

    If your vehicle is worth more than what you owe on it, you don't need gap car insurance. But that often doesn't apply to car owners who:

    • placed a down payment on the vehicle of less than 20 percent
    • bought a vehicle with an above-average rate of depreciation (like a sports car)
    • transferred negative equity from an old car into a new car's loan
    • have a car loan with a term of five years or more
    • are leasing their vehicle (some lease agreements will require you to get gap coverage).

    Keep in mind that gap car insurance has nothing to do with paying for personal injuries or property damage arising from a car accident. It also offers no liability coverage of any type. In other words, gap car insurance will not help you meet your state's minimum car insurance requirements.

    Is My Car Eligible for Gap Insurance Coverage?

    Most car insurance companies will only offer gap insurance coverage for brand new vehicles, or those that are less than two or three years old. Also, gap insurance only pays out when the vehicle is a complete loss. This includes getting your car totaled or having it stolen. Finally, individual car insurance companies will have their own rules or conditions for providing gap car insurance coverage. These may include:

    • the customer must first purchase full car insurance, such as uninsured/underinsured motorist, collision, and comprehensive coverage along with the state's minimum coverage;
    • the customer must be the original owner of the vehicle, and/or
    • the customer must have a car loan through an eligible financial institution or bank.

    Where Can I Get Gap Car Insurance?

    There are three main sources for gap car insurance:

    • you can purchase a plan from the dealership where you bought your car
    • your car loan lender might offer you the option of adding gap coverage to your monthly car loan payments, or
    • you can buy the insurance from a car insurance company.

    If you decide to get gap coverage from your dealership or lender, it'll be more convenient, but likely more expensive. That's because the cost of the coverage will get added to your overall car loan balance, which you'll be paying interest on. Over the course of a three or five-year car loan, that could add up to an extra few hundred dollars in interest charges.

    An Alternative to Gap Car Insurance

    If you're not sure about gap car insurance, another type of coverage to think about is "new car replacement" insurance. If you suffer a covered loss that totals your vehicle, this coverage will give you enough money to buy a new car of the same make and model, less any deductible. If you don't want to buy a new car, you can use the money to pay off your car loan. But it's important to note that new car replacement coverage is usually more expensive than gap car insurance.

    You can probably handle the vehicle repair part of an insurance claim after an accident, but if issues like vehicle valuation get contentious, or you're also making a claim for injuries, you might benefit from having a legal professional on your side. Learn more about when to get a lawyer's help after a car accident.

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