What is gap insurance? Do I need it?

Gap insurance is a term you hear used occasionally, though you may not know if you need it or even what it is.  Fortunately it’s about as straightforward as insurance gets.

The basic idea is this:

  • You take out a loan for $30,000 and buy a new vehicle
  • The moment you drive that vehicle off the lot it’s value drops to $25,000
  • Your car is totaled and your insurance company gives you the value of your vehicle ($25,000)
  • What happens to that other $5,000 you owe?

This is where gap insurance comes into play.  You may have full comprehensive and collision coverage as is required here in Massachusetts when you take out a loan to purchase a new vehicle, but that coverage will only pay the cash value of your vehicle.  If you still owe more than that value on your loan you can be stuck paying a pretty large sum for a vehicle that no longer exists.

Gap insurance can be a huge help and save you a lot of money if anything happens to your new vehicle.  Once your loan amount is less than the value of your car you can simply cancel your gap coverage.  Easy.

As always you can leave us a comment below, follow us on Twitter, or head over to Wolpert.com for anything else.

Published in: on January 22, 2010 at 5:56 pm  Leave a Comment  

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