A person purchases a shiny, showroom-new car from a car dealer and drives it off of the lot, only to have the car totaled in an accident on the way home. Even though the driver purchased comprehensive and collision coverage, the coverage only pays the cash value of the car, and not the retail price. Before driving the car off of the lot, car owners should find out what is GAP insurance, and whether it is right for them.
GAP is an acronym for “guaranteed auto protection”. GAP also refers to the “gap” between the sale price of a car and its actual present value. Most comprehensive and collision policies pay actual cash value, instead of retail value, which leaves car owners owing thousands of dollars to their lender. Gap coverage pays the lender the difference between the actual cash value of the car, and the outstanding balance on the loan or the lease.
Many car owners leave the lot owing more than their car is worth. For instance, some car owners put little or no money down, or borrow the dealer price, along with tax, license, and registration. Some car owners roll negative equity from a previous loan into their new car loan. Also, if a car owner drives more than 15,000 miles per year, a car will lose value faster than the owner can pay off the loan. Additionally, if a car owner takes out a loan with an extended term, the depreciation will outpace the equity built in the vehicle.
Vehicles must meet certain criteria to be eligible for gap accident insurance. Most of the time, the vehicle must have comprehensive and collision coverage, in addition to the gap policy. Also, the lender must be a financial institution, rather than an individual, in order to qualify for coverage.
Gap insurance is a must when leasing a car. In fact, most leasing contracts carry gap coverage, so drivers should check their contract, before purchasing an additional policy. Also, sometimes leasing contracts carry a gap waiver, which protects the driver from owing cash in the event that the vehicle is a total loss.
Again, most leased cars are required to have comprehensive and collision coverage. In all cases, drivers must be in full compliance with the terms of the lease, and must follow all instructions issued by their insurer. For instance, the insurer may require the driver to continue making vehicle payments, until the policy benefit is paid.
Insurers generally charge less for coverage than car dealers. Policy holders should ensure that all types of loss, including natural disaster, theft, and accidents, are covered. Also, if purchasing from an online insurer, policy holders should research the vendor, before they provide any personal or financial information.
Not everyone is able to afford a substantial down payment on their new or used car; to make monthly payments affordable, many people choose sixty-month loans. In these situations, car owners need to ask their insurer what is GAP insurance. A small addition to a monthly premium will buy substantial peace of mind, for drivers who cannot afford to cover the gap.