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| What is Gap Insurance? (photo: financebuzz.com) |
Why is gap insurance necessary?
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| photo: hips.hearstapps.com |
When you purchase or lease a new car or truck, the vehicle's value starts to decrease the moment it leaves the car lot. Within a year, most cars lose 20 percent of their value. A standard auto insurance policy covers the car's depreciated value, which means that it pays the current market value of the vehicle at the time of a claim.
However, if you finance the purchase of a new car with a small deposit, the amount of the loan may exceed the car's market value in the early years of ownership.
In the event of an accident that results in significant damage or a total loss of your car, gap insurance covers the difference between the current market value of the vehicle (which your standard insurance will pay) and the amount you owe on the loan.
When you might need gap insurance
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| photo: hips.hearstapps.com |
If you have made a down payment of less than 20%, financed your vehicle for 60 months or longer, leased it, bought a vehicle that depreciates faster than the average, or rolled over negative equity from an old car loan into the new loan, it is advisable to consider purchasing gap insurance for your new car or truck. Gap insurance is usually required for a lease.
Where you can get gap insurance
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| photo: hips.hearstapps.com |
Gap insurance for your new vehicle can be obtained from your car dealer, but it's worth noting that most car insurers also offer it and often at a lower cost than the dealer. Adding gap insurance to your auto insurance policy, along with collision and comprehensive coverage, typically only increases the annual premium by around $20.
Read More: 10 Best Long-Term Investments for 2023
Is it possible to obtain gap insurance after purchasing a car?
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| photo: blog.way.com |
Depending on the car's model year, you may be able to purchase gap insurance after buying a car. Car dealerships are not the only places that sell gap insurance; many insurance providers include it as part of their car insurance policies. According to the III, purchasing gap coverage from an insurance company is frequently less expensive than purchasing it from a dealership.
Some insurance providers may require that your car be brand new in order for you to purchase gap insurance. This could imply that:
- You are the car's original owner (you have the original lease or loan on the car).
- The car is not more than two or three model years old.
Check with your insurance provider to determine what criteria must be met in order to purchase gap insurance.
Is gap insurance a worthwhile investment?
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| photo: ichoose.com |
If you're contemplating purchasing gap insurance, keep in mind that this type of coverage may only be available if you're leasing or financing a new car. Next, evaluate how much you owe on your auto loan compared to the value of your car. (You can obtain an estimate of your car's worth by visiting a website like Kelley Blue Book.) Do you owe more than your car is worth? Could you afford to pay the difference out of pocket if your car is totaled?
According to the III, you should consider purchasing gap insurance in the following situations:
- If you made a down payment of less than 20% on your vehicle
- If your auto loan has a term of 60 months or longer
- If you're leasing a vehicle. If you're leasing a new car, the III indicates that many lease contracts include gap coverage. Check your contract to see if you have coverage.
If you have any queries regarding gap insurance, speak with your insurance provider, who can assist you in understanding your options.
Read More: Guide to Financing a Car
Source:
- https://www.iii.org
- https://www.allstate.com
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