The term “gap insurance” often comes up when you discuss financing or leasing cars. You might be wondering if you’re covering everything you need to cover about your vehicle. So, what, exactly, is gap insurance?
In a nutshell, if you owe more on your car than it is worth, or you’re leasing your vehicle, you should have gap insurance to cover it. If you own your car outright or owe less than it is worth, then you’re all set and don’t need gap insurance.
What does Gap Insurance Do?
The moment you drive a car off of the lot, it becomes a “used car.” As such, it begins to depreciate greatly. Gap insurance can be seen as the insurance that covers the gap in what that car is worth and what you paid for it.
Let’s say you own a car that you bought for $25,000, and since you’ve been driving it has depreciated in market value to $21,000. You financed it, so you owe $23,000. You would likely want gap coverage to cover that $2000 difference. If you’re wondering why it matters, then read on.
Why does this Matter?
When it comes to the case of a total loss of your vehicle, you’ll be very upset if you owe more than the car is worth. Even if you have comprehensive and collision coverage, you’ll still owe the difference of the gap in your car’s value and what you owe on it. Your insurance company isn’t obligated to pay off your car loan — only to pay the amount that the car is worth.
Gap coverage, however, would cover that difference in the event of a total loss. So, if you have a vehicle that is brand-new, or that you’re leasing, and it gets stolen or totaled, you’ll be happy you have gap coverage.
Do I Need Gap Coverage?
So, if you own your car outright, or if you owe less than the car is worth, you’re good. No extra coverage needed! Comprehensive and collision coverage will cover your vehicle in the event of a total loss, so you’ve got nothing to worry about. But gap coverage is pivotal for those who owe more than the vehicle is worth, and should absolutely be carried by anyone who is leasing.