What is Gap Insurance?
Before we discuss whether or not you need it, a quick definition is in order:Gap insurance on a vehicle is designed to provide the difference between the current market value of the vehicle and what you actually owe on your car or truck (loan OR lease).
If you purchase a vehicle off the lot for $20,000, the second you drive it off the lot it is now worth about 10% less.
While this may not seem like a significant amount, within one year it is depreciated by about 20-30% and this continues throughout the life of the vehicle. The actual depreciation rate will vary based on the specific vehicle, with some brands and models having higher or lower depreciation rates than others. By the end of four years, the vehicle has a market value of about half of the original price for most vehicles, which can be thousands of dollars of difference between the outstanding balance on the loan.
Here’s an example of how Gap insurance works:
You buy a brand new car for $30,000. Let’s say you don’t make a down payment (or a very small one) and finance the balance. One year later you’re in an accident that wipes out your car. The insurance company writes a check for the current value of $24,000. Your loan balance is $26,000. The gap insurance will pay the $2,000 difference between the loan balance and value ($26,000 – $24,000). Otherwise you would have to pay this difference out of pocket.
Yes, we've paid claims based on the above example. And let me tell you- nothing is more painful than having to continue paying for a car you no longer have. And if you still owe money- you still must pay. Gap insurance makes this pain go away.
Did you know you can get Gap insurance via your auto insurance?
Most dealerships offer gap insurance when you buy your vehicle, but did you realize you can probably also purchase it from your auto insurance company? All our companies offer it, and it is known by different names, depending on the company:
- Loan/Lease Gap
- Equity Gap
- New Auto Security
No matter what it's called, if you ask your auto insurance company if they offer an endorsement that pays off the balance of a loan or lease if your car is totaled, they’ll know what you mean. It's a simple endorsement that is added to your policy.
For many insurance companies, the vehicle must be NEW (not previously titled), to be eligible. However, some companies do allow used cars to get gap coverage. So, ask! Used cars can also suffer the same fate as new cars, in which the loan balance exceeds the value of the car at claim time.
When considering whether or not to buy gap insurance, use the following as a guide:
- Ask your auto insurance agent if he offers gap insurance and get the details BEFORE buying the car. The dealership's gap insurance could differ significantly and it's hard to make a decision unless you know what's available and which is the better deal.
- It's very affordable when purchased via your auto policy. Real-life example- our customer just bought a new vehicle. She purchased the gap insurance from the dealership at a cost of $12 per month. That’s $144 for the year. We could add the coverage to her auto insurance policy for $20. For the whole year. So it's definitely worth asking your auto insurance agent about.
- Gap insurance doesn't just cover the vehicle for an accident; it will also cover your vehicle if it is stolen (and never recovered). As new vehicles are more likely to be stolen than older cars, it is a good investment for most drivers.
- Many incentives for new vehicle require little or no down payment. This creates a more substantial gap that can create a financial hardship in the event of an accident that totals the vehicle or if the car is stolen.
Have more questions about gap insurance? Give us a call at (937) 592-4871 to request your Ohio auto insurance quote or fill out the form on our website- only a few pieces of information will get you started!