Automobile Gap Insurance – What Does It Cover?

You can pick up a great new car deal right now. If your credit is decent, you may even be able to get some shiny new wheels with no money down. That’s great, unless your ride gets totaled or somebody steals it. That’s when you’ll become painfully aware of the discrepancy between what you owe on the loan and what your car insurance company will pay. That’s why you need to know about automobile gap insurance. It can provide financial peace of mind during the first couple years you own your new car and, if you’re leasing, automobile gap insurance is very likely a requirement.

When you drive your car off the lot, its status changes from new car to used car, and its value depreciates accordingly – sometimes as much as 20% to 30%. To the insurance company, your $20,000 vehicle may only be worth $16,000. But your lender says you owe $20,000 plus interest, sales tax and license fees. Let’s say it all adds up to $25,000. The difference between the two figures — $9,000 – is the gap and unless you have automobile gap insurance to cover it, you’re going to have to make it up to the lender. And you won’t even have a car to show for it. Ouch!

But what if your car is totaled by another driver who was clearly at fault? Won’t his insurance company have to pay the outstanding balance on your car? Nope. They’ll see it the same way your auto insurance company sees it and only pay the depreciated cash value.

However, if you have gap insurance, the policy will make up the difference between the cash value of your car and outstanding balance on your lease or loan. Some policies will even pay your regular auto insurance policy deductible. That’s why it pays to shop around for gap insurance before you shop for a car to get the best possible coverage to protect you from financial loss.

As with all insurance, you’ll want to check for exclusions and limitations when looking for automobile gap insurance quotes. Most policies will set a maximum loss limit of $50,000 and a total loan amount financed limit of $100,000 or less. Depending on the terms of your loan, your gap claim settlement may not cover the entire amount of the gap. Your gap insurance won’t cover late charges or other penalties you may owe your lender. The terms of your auto loan can’t exceed 84 months or 12.5% APR and the loan can’t have a balloon payment attached to the end of the term.