And does everyone need it? I was under the impression that full coverage auto insurance would suffice.
What exactly is “gap” insurance (auto)?
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"full coverage" doesn’t cover everything, EVER. It’s not a real insurance term, so it is VERY misleading (don’t START me on "Act of God" which is also a non-insurance term).
Gap coverage pays the difference between the payoff balance on your car loan, and the actual cash value.
There are THREE different valuations you can have for your car; the most typical is Actual Cash Value. 90% of auto policies are written on an Actual Cash Value basis. If you buy a brand new, $20,000 car, the second you drive it off the lot, it loses value – maybe $4,000. If you put $500 down on it, or worse, no money down – and you have an accident when it’s 5 minutes old, guess what!! The insurance won’t pay you enough to pay off the loan!! That’s where Gap coverage comes in. It will pay off the balance between the ACV of the car, and the loan, WITH EXCEPTIONS.
Major exception – if you were "upside down" on your prior car, and you rolled that balance into the new loan, the gap coverage will NOT pay off that prior balance.
You don’t need it if you own your car outright, and you don’t need it if you have equity in your car (the loan balance is less than the ACV). You probably need it if you’re "upside down" on the loan, or if the car is leased.