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Covering Losses with Gap Insurance


If you already know that your new loaned car immediately depreciates as soon as it rolls out of the seller’s lot, then you will certainly be weaving through traffic with extreme caution.  The specter of accident can surely haunt you and the idea that your car is twenty to thirty percent less than its buying price is indeed frightening.  What if, in spite of your being very careful, you still have a mishap due to someone else’s recklessness? What if your newly bought car gets totaled, smashed beyond repair? How are you going to have it replaced when the insurance firm is only going to pay you the depreciated value while you still have to pay the loaned car with its buying price?  Without a gap insurance to boot, questions will be left unanswered.

Gap insurance provides you a guarantee that you will still be able to pay up for the car.  As its name implies, it covers the gap between the buying price of the car and the depreciated value. Therefore, that is one less headache for you, a much-needed relief when your head is still throbbing from the accident.

Here is how it works.  It is just your second day with a newly acquired car for $400,000 through a loan from a bank you made.  By this time your car has depreciated by 20%, so it is already worth $320,000.  While on your way to the office, some drunk driver in a bigger and heavier sports utility vehicle slams into your sedan’s side leaving you maybe a bit scathed. However, your car is in such a bad shape that having it repaired is no longer possible. What would probably worry you are not hospitable bills for the minor stitches, but the loss on the car or vehicle. The insurance firm will only cover $320,000 out of the total amount, but you still owe the bank $400,000. However, with gap insurance under your belt, your insurance firm will pay for the $80,000 difference.

Clearly, it absolutely rids you of worries when driving a loaned car.  It may not be necessary if you are able to buy your car on cash basis.  However, with today’s struggling economy and its skyrocketing prices, it is no longer practical to buy a costly commodity such as a car for a one-time payment deal.  The most favored method of payment is to have it on a loan. In that case, a gap insurance is a necessity, an additional, but small cost to avoid a total loss.