Should You Carry Gap Insurance On Your Vehicle?
Whether you’re leasing a new car or you took out an auto loan to purchase a vehicle, you may be offered a gap insurance policy. Also called loan-lease pay-off coverage, a gap policy covers the difference between the cash value of your vehicle and the outstanding balance on your loan or lease in the case of a collision or natural disaster that totals your car.
When the actual cash value of your car, as determined by your auto insurance company, is lower than the total owed on the loan, you may get stuck covering the “gap” yourself. For this reason, many consumers choose to carry a gap policy. However, there are pros and cons to this coverage.
You might want a gap policy if…
If you’ve purchased a new vehicle, it is likely to lose about 30 percent of its value over the first 12 months you drive it. If you made a down payment of less than 30 percent, you may become “upside down” on the loan quickly – meaning your vehicle would soon be worth less than what you owe the bank. If you find yourself in this situation and you know you would not be able to afford thousands of dollars out of pocket in the event of an accident, gap insurance will provide both peace of mind and the money you would need to pay off the loan balance.
You can probably skip the gap policy if…
If you put more than 25 percent down on the purchase of your new or used vehicle, or you have an emergency fund available for use in the event of a total loss accident, it’s probably safe to skip the gap coverage and save yourself several hundred dollars per year.
If you’d like some additional auto protection but aren’t sold on a gap policy, talk with your auto insurance provider. Many offer additional coverage options that may suit your needs.
Image via Flickr/autoinsuranceagents