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Auto gap insurance – is it needed?

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Things to Remember...

  • Gap insurance is an optional coverage that can save you hundreds of dollars if your car is totaled
  • Gap insurance is only used in the case of a total loss when the insurance company will not cover the full amount of what is owed to the financial institution for the totaled vehicle
  • There is immediate depreciation of your vehicle when you drive it off of the lot

Auto gap insurance is not something that consumers need to purchase. However, as an optional car insurance cover, it does have the potential of saving you hundreds or thousands of dollars if your car becomes a total loss.

Read on to decide if you need this type of auto insurance coverage.

Enter your zip code above to compare free online auto insurance quotes! If you owe the bank more money for your car than the insurance company is paying, then you are expected to pay the difference.

Why does it need to be paid in a lump sum?

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Before the auto insurance company sends a check to your financial institution where your auto lien is held, they request a letter of guarantee.This letter is an agreement that the bank will release the lien into the name of the

This letter is an agreement that the bank will release the lien into the name of the auto insurance company. The insurance company can recoup some of their cost by selling parts from your totaled vehicle.

Meanwhile, the bank has a leftover tab of what you owe for this vehicle. There is no title, and there is no vehicle anymore. They have nothing they can take away if you do not pay.

They look to get the full amount of the loan paid for, and if it is not, then you risk going into collections. Some banks and financial institutions will work with you on making payments, but it’s a rare circumstance.

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How can I purchase auto gap insurance?

Auto gap insurance is often bought at the time the vehicle is purchased. If you buy the vehicle at a dealership, they will generally have an outside company that offers gap insurance. Sometimes the bank you are financing the loan with will also have a gap insurance plan you can enroll in.

This is a one-time fee at the time the vehicle is purchased at the dealership.

It depends on the dealership and/or the financing company whether or not you can finance this cost into your loan. It depends on how long your loan is and the gap insurance policy as to how this will affect your monthly payment.

How do I decide if I need gap insurance?

Gap insurance is only used in the case of a total loss when the insurance company will not cover the full amount of what is owed to the financial institution for the totaled vehicle.

If you plan on paying off the vehicle in less than two years or are placing a substantial down payment, then you may not benefit from purchasing gap insurance. If the payments match or are greater than the depreciation of your vehicle, then gap insurance will not benefit you.

There is always a risk of totaling the car when you are out on the roadways. If you make a small down payment and total the car in the first month or two, you may stand to lose a substantial amount from not having gap insurance.

There is immediate depreciation of the vehicle when you drive it off of the lot. There isn’t as much risk when purchasing a used car, but you are still at risk depending on what your auto insurance provider will deem your vehicle to be worth.

Gap insurance usually runs between $300 and $500. Depending on the value of your car, that would be the equivalent of one or two payments. When you’re driving your automobile, it is nice to have the peace of mind that you are covered in the case of an accident.

It does not matter if the accident is your fault or not. The auto insurance company is only going to pay the market value of your vehicle. If your car has depreciated more than you have paid down your loan to the bank, you may have a large bill to cover in one lump sum.

Most professionals in the auto industry will suggest that you purchase gap insurance. The only exception is if you are placing a substantial down payment to make the purchase. A few extra dollars a month is better than risking a bill of several thousand dollars with nothing to show for it.

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