If you’re in the market for a used car, it’s essential to understand the different types of insurance coverage available to you. One often-overlooked policy is gap (guaranteed asset protection) insurance. This type of insurance covers the difference between your car’s worth and the amount left on your loan if your car is stolen or totaled. Without gap insurance, you could be left responsible for thousands of dollars in expenses. Here’s why you need gap insurance on your used car.
What Is Gap Insurance, and What Does It Cover?
Gap insurance helps pay off your car loan if your vehicle gets stolen or totaled. If you owe more on your car loan than the value of your vehicle, gap insurance will cover the difference.
Say, for example, you purchase a used car for $15,000. After factoring in taxes and fees, your total loan amount comes to $17,000. However, two years later, your vehicle is totaled in an accident. The insurance company determines your car is only worth $12,000 at the time of the accident. Without gap insurance, you would be responsible for paying the $5,000 difference between the current value of your car and the amount left on your loan.
How To Get Gap Insurance on a Used Car
If you’re financing a used car through a dealership or lender, your loan agreement might include gap insurance. If it doesn’t, you can purchase gap insurance as an add-on to your regular auto insurance policy. Be sure to shop around and compare rates from different insurers before deciding.
Is Gap Insurance Worth the Expense?
Gap insurance is a wise investment, especially if you’re financing a used car with a high loan amount. If you can’t afford to pay off your loan in full in the event your vehicle is totaled, gap insurance gives you peace of mind knowing you’re covered.
The benefits of getting gap insurance on a used car include:
- Peace of mind knowing you’re covered if your vehicle is totaled or stolen
- Protection from being left responsible for thousands of dollars in expenses
- Coverage if you owe more than what your car is worth on your loan
While gap insurance is not required by law, it’s an important type of coverage to consider when financing a used car. If you’re upside down on your loan or don’t have the funds to pay off your debt in full, gap insurance can help protect you from financial hardship. Compare rates before buying a policy to ensure you get the best value for your money.
How Much Does Gap Insurance Cost?
The cost of gap insurance varies depending on many factors, including:
- Your vehicle’s value
- Your loan amount
- The length of your policy
However, you can expect to pay around $20 to $40 per year for gap insurance coverage on top of your regular car insurance policy.
When Is the Best Time To Buy Gap Insurance?
The best time to buy gap insurance is when you purchase your car. This way, you can add it to your regular auto insurance policy and be covered from the start. You can also purchase gap insurance at any time during your loan term. However, keep in mind that the longer you wait, the higher the risk of needing it. If you purchase gap insurance after getting a car loan, tell your lender you have coverage, so they don’t require you to buy an additional gap insurance policy.
What Happens if I Don’t Have Gap Insurance?
If you don’t have gap insurance and your car is totaled or stolen, you might be responsible for paying the difference between the value of your vehicle and the amount owed on the loan. While there are no legal ramifications for not having gap insurance, you will need to make arrangements to pay the balance. This payment could interfere with your ability to finance another vehicle for commuting to and from work.
How To File a Claim With Gap Insurance
If you have gap insurance and your car gets totaled or stolen, you’ll need to file a claim with your auto insurance company first. Your gap insurance policy will then kick in and cover the difference between the value of your car and the amount left on your loan. When filing a gap insurance claim, be sure to have the following information handy:
- Your gap insurance policy number
- The date of the accident or theft
- A police report, if available
- Documentation from your lender showing the outstanding balance on your loan
- Documentation from your insurance company detailing the value of your car
With this information, your gap insurance provider can process your claim quickly and get you the coverage you need.
Alternatives to Gap Insurance
If you don’t want to purchase gap insurance or your lender doesn’t require it, you might consider a few alternatives, such as:
- Paying off your loan in full. If you have the funds available, paying off your loan in full is the best way to protect yourself from being upside down on your loan.
- Refinancing your loan. If you have good credit, you might be able to refinance your loan at a lower interest rate. This can help reduce your monthly payments and relieve you if you’re struggling to keep up with your current loan.
- Trading in your car. If you’re not happy with your current vehicle or it’s showing its age, trading it in for a new one might be a good option. You can avoid being upside down on your loan and get a newer car that makes you happy.
Gap insurance is an important type of coverage to consider when financing a used car. If you’re upside down on your loan or don’t have the funds to pay off your debt in full, gap insurance can help protect you from financial hardship in the event your cars gets totaled or stolen. Be sure to shop around and compare rates before buying a policy to ensure you get the best value for your money.
At FIXD, our mission is to make car ownership as simple, easy, and affordable as possible. Our research team utilizes the latest automotive data and insights to create tools and resources that help drivers get peace of mind and save money over the life of their car.
