Car insurance is a legal requirement for all drivers, but it only covers the current value of your car in case of an accident or theft. Unfortunately, the current value of your car is often significantly less than what you paid for it. This is where GAP insurance comes in – it covers the “gap” between the current value of your car and the amount you still owe on your car loan.
GAP insurance is especially important for new cars, as they tend to depreciate rapidly in the first few years. According to Edmunds, a new car loses approximately 20% of its value in the first year and up to 50% by the end of the third year. This means that if you were to get into an accident or your car was stolen during this time, your insurance would only cover the current value of the car, which could be significantly less than what you owe on your car loan.
GAP Insurance for Your Car
Let’s say you buy a new car for $30,000 and take out a loan for the same amount. A year later, you get into an accident and your car is totaled. At the time of the accident, the current value of your car is only $24,000, but you still owe $28,000 on your car loan. Without GAP insurance, you would have to pay the $4,000 difference out of pocket. However, with GAP insurance, the difference would be covered, and you wouldn’t have to worry about making up the shortfall.
GAP insurance can also be beneficial for people who lease cars. When you lease a car, you are essentially paying for the depreciation of the car during the term of the lease. If your leased car is stolen or totaled, the insurance company will only pay the current value of the car, leaving you responsible for paying the difference between the current value and what you owe the leasing company. GAP insurance can help cover this shortfall, giving you peace of mind and protecting you from unexpected expenses.
In conclusion, GAP insurance is an essential safety net for car owners and lessees. It can protect you from significant financial loss if your car is stolen or totaled, and can give you peace of mind knowing that you won’t have to make up the difference between what you owe and the current value of your car. While it may be an additional cost, the peace of mind and protection it provides is worth the investment. Be sure to talk to your insurance provider to see if GAP insurance is right for you.