Gap insurance coverage is designed to protect two specific types of drivers against the costs of a total loss: those who are financing, and those who are leasing. If you own your car free and clear or owe less on your loan than the car is worth, you don’t need gap insurance.
What is gap insurance?
Simply put, the “gap” in gap insurance is the difference between a car’s actual cash value (ACV) and how much you owe on your lease or loan. The gap develops due to depreciation. As you know, a car becomes “used,” and therefore begins to depreciate, the moment you drive it out of the dealership.
Depreciation means that a car is worth less than what you bought it for after it’s purchased. If you purchase a car for $30,000, its value may have dropped to $26,000 just 2 months later — and if you’ve been making payments of $500 a month, that means you owe $3,000 more than it’s actually worth.
Owing more than your car is worth
For many, owing more than the value of your car is simply a fact of car ownership. But for those who experience a total loss — i.e., those whose car is stolen or demolished in a wreck — owing more on your loan than your car is worth is a big problem.
Why? Because if your car is deemed a total loss while you owe more than its value, your car insurance company won’t pay off your loan in full. Instead, they’ll pay the car’s ACV: its sticker price minus depreciation. For some, that means owing several thousand dollars on a loan for a car that doesn’t exist anymore — unless you purchased gap coverage.
Here are some indicators that gap insurance might be right for you:
- You plan to finance a car with little or no down payment
- You plan to drive a lot of miles
- You plan to take out a long-term loan, usually more than 60 months
Beyond the gap
As we mentioned earlier, if you’ve paid off enough of your car loan that you owe less than it’s worth, you don’t need gap coverage. In fact, if you’ve got comprehensive and collision coverage, you’ve got all the insurance you need to pay off your loan.
Let’s say you owe $12,000 on a Ford Focus worth $18,000 at the time a reckless driver totals it in a late-night collision. You weren’t at fault, so you file a claim and your car insurance company pays off its actual cash value, giving you the 12,000 you need to cover your loan, leaving you $6,000 minus your deductible.
And if you own your car free and clear when it’s totaled, you may well get enough to actually replace it.
For more information about IAS, or to learn more about car financing, leasing and purchase programs for expats, which include free gap insurance, please visit: www.intlauto.com.