ORLANDO, Fla. — For many, owing more than the value of your car is simply a fact of car ownership. Specifically those who experience a total loss may find themselves owing more on a loan than the car is worth. Gap insurance, if you need it, is an important consideration at the time of purchasing a car insurance policy. If you've paid off enough of your car loan that you owe less than it's worth, then you don't need gap coverage. Your comprehensive and collision coverage might be all the insurance you need to pay off your loan.
According to edmunds.com, the average new car depreciates 11 percent as soon as it leaves the dealer's lot. After a year, it's worth 20 percent less than new. That means, if you didn’t put much for down payment and included your licensing and taxes in your loan, as it happens very often, you could end up upside-down very soon. Gap is an acronym for “guaranteed auto protection” or “guaranteed asset protection.” It is meant to provide protection in the early years, when the loan exceeds the value of the car.
You bought a car for $24,000 and you include taxes on the loan and put only $1,000 in down payment you would be agreeing to an approximate sale price of $26,500 when you sign the papers. Let’s say about a year after you total it, and that’s when you find out the actual cash value of your basically new car is now around $19,200. Assuming you have a $500 deductible, your car insurance company will pay out $18,700 to your lien holder but you still owe $23,500 that would be paid in full by your car insurance with GAP. With a gap insurance policy that includes coverage for your deductible, the deductible amount is not refunded back to the vehicle owner. Instead, the amount of the insurance deductible is applied to the amount of the insured’s unpaid loan balance.
Many car owners believe gap insurance is a catch-all policy that makes their car payments anytime they're unable to. That is not the case.
Check with your own auto insurer first for cost and availability. Costs vary due to insurance companies' different rating systems, but typically gap insurance is calculated as being 5 percent to 6 percent of your physical damage coverage costs. If your collision and comprehensive coverage costs are $500, gap insurance coverage will add around $25 to your overall premium. Gap insurance is also offered when you sign your loan documents and can be incorporated right into the purchase paperwork. When you buy it in this manner, the gap insurance charge is typically a flat premium of around $500 to $700.
After a vehicle is paid off, any unearned premium is refunded to the insured. For instance, if a vehicle is financed for 48 months but is paid off in 24 months, two years’ worth of premium charges are due back to the insured as gap coverage is normally paid for in advance.
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