Financing a car could cost you more than you expect. If you get into an accident or your car is stolen, it’s possible that you could be left paying auto loan payments for a car that’s already been totaled.
This can even happen when you carry full coverage insurance on the vehicle and the loss is covered by your carrier.
It’s important to know the limitations of an auto insurance policy before you assume that you’re fully covered.
You’re required under your lending agreement to purchase full coverage when you finance a used car, but your auto insurer isn’t required to pay off your loan when you file a claim.
For this type of protection, you’ll need supplemental GAP insurance. Here’s what GAP insurance pays for and when it’s best to carry it:
How much will full coverage pay when you file a claim?
Full coverage refers to an auto policy that includes comprehensive and collision coverage.
Each of these physical damage coverage options is designed to pay to repair your own vehicle when you get into an accident or you have a non-collision loss. Unfortunately, many consumers don’t understand how much their policy will pay for repairs.
Under your Personal Auto Policy, the insuring agreement says that the insurance company must pay for reasonable repair costs when you have a covered loss.
There’s not a fixed dollar limit like there is for third-party claims, but there is a limit. This limit is called Actual Cash Value, and it refers to how much the vehicle is worth at the time of the loss.
How does the company determine your car’s Actual Cash Value?
Actual Cash Value is your car’s replacement cost minus depreciation. Since depreciation is factored into the valuation when you’re filing a claim, it’s very important to understand how depreciation works.
When you’re filing a claim for damage and your car is totaled, the carrier will use valuation reports and sales listings to determine how much to pay.
When you buy a used car, the car has already depreciated by 20 percent of its value.
It’s possible that it’s depreciated by even more than that if you buy a car that’s a few years old. Depreciation doesn’t stop after you sign the bill of sale. In fact, every year the value of your car will fall which reduces the insurer’s obligation to pay.
How does GAP insurance help fill the gap?
GAP insurance is a form of supplemental insurance that you can buy through the dealer, a third-party specialty company, or your personal auto carrier.
The coverage stands for Guaranteed Auto Protection because it guarantees that your car will be paid off after you file a physical damage claim or a third-party claim.
You only use your GAP insurance after you file a claim for your comprehensive and collision coverage through your carrier. Once you accept your total loss settlement for the ACV of your car plus tax, title and registration fees, you can file a claim for whatever the balance is on your loan.
This claim is filed against your GAP insurance benefit.
Do GAP insurance providers offer any other type of protection?
Paying off a totaled vehicle with your GAP benefit is nice, but that doesn’t help you get a new car.
You have to go car shopping, qualify for a new loan, and make a down payment. Since not all consumers have hundreds or thousands of dollars to put down on a car, some GAP benefits will help you make a down payment on a new car.
When do you need GAP insurance on a used car?
Paying for GAP insurance isn’t always advisable.
There are times where paying the premium is a waste of your money. If you owe less on the car than it’s worth or you intend to make large payments on your loan right after buying the car, don’t get GAP insurance.
Here are some scenarios where you should pay the premium for coverage on a used car:
- You roll over negative equity from your trade into your loan
- You don’t put down money when you’re financing
- You take a high-interest loan because you have poor credit
- You buy a car that’s known to depreciate in value quickly
- You add a lot of features on top of sales price in the financing office
- You take out a loan where interest is front loaded so principal goes down slowly
Why shouldn’t you add GAP insurance on your auto loan?
It’s tempting to add on GAP insurance, warranties, alarm systems, and other features when you’re financing your car. It brings up your monthly payment but not too much. What you don’t know is that adding GAP onto your loan defeats the purpose.
If your loan-to-value ratio is low, why bring it up by adding hundreds or thousands of dollars in premiums?
The best way to invest in GAP insurance is to buy coverage through an insurance company. If you add the coverage to your policy, you’ll pay a premium each month until you remove the coverage.
Not all cars qualify for the GAP protection. If you’d like to price the coverage, you should get quotes from multiple carriers. You can do this by using an online quote tool and comparing the rates through carriers that offer GAP coverage options.
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