What is Gap Insurance?
Friday, March 11th, 2011Have you ever been shopping for insurance and had the agent ask if you want gap insurance added onto you policy? Or maybe, you are sitting in a dealership buying a new car and the sale person asks if you want to include gap insurance into the price of the car? You just sit there and wonder what on earth, is gap insurance. Gap insurance is a valuable asset to any person who owns a car and has a loan on the vehicle.
Gap insurance benefits the buyer and the holder of the loan. The newer a car, the greater the need of having to insure it. Let’s say a person buys and new car and drives it off the lot, most people realize that there is this thing called depreciation that happens right away. Gap insurance pays the difference between the loan amount and the actual value of the car. It covers the monetary gap due to depreciation.
What happens if a person has a car loan and does not have gap insurance in place? Is a question that pops into people’s minds after finding out what gap insurance is for? If the car is deemed a total lose, the car insurance company will pay the blue book value of the care and not the sale price. The car owner will still be responsible for the balance left on the loan. For instance if the loan was for $20,000 and the value of the car came to $18,000 the insurance company would only pay $18,000 leaving the owner responsible for the remaining $2,000. Failure to pay the money could result in loan default hurting credit scores and your ability to buy on credit in the future.
There is one danger of gap insurance to be careful to watch out for. Most policies from insurance companies tend to add this onto the policy as a benefit. So it will not be necessary to buy this from the dealership. On the other hand if the insurance company does not offer it to you, then you will need to buy it from the dealership. Always make sure your covered one way or the other when you take a loan out on a car.