Familiar with gap insurance? For many car owners, the unfortunate answer is ‘no’. They do not even realize that there is a gap between what their standard vehicle insurance pays for, and what is not covered. That gap can prove to be costly for new car owners, as you will see.
There is a significant difference between what a new vehicle is worth and what you currently owe on a newly-bought (or leased) car. If a new car is stolen or gets damaged beyond repair while you are still paying for it, things could get really expensive.
This happens a lot to new vehicle owners. They sign a lease contract, and suddenly it hits them: “What shall I do if something happens to this car?” Technically speaking, your car still belongs to the company you leased it from, until you complete payments. However, guess what – you are still responsible for replacing the car. That is a painful thought, indeed.
Gap insurance provides coverage for the money you still owe the car manufacturer or leasing company, after your car insurance pays off damages you incurred for the loss. As its name implies, it covers the gap between what standard vehicle policies pay for if something happens to a vehicle and what you still owe to the company you bought or leased the car from.
Take a look at this example. You bought a car for $30,000, and making payments at $600 a month with interest. Out of nowhere, a huge tree falls on your car and turns it into scrap metal. You call the insurance company, and they decide that the car was worth only $25,000 at the time of the accident.
However, the car company still needs the full amount that you owe them. They throw in tax, interest, and license fees, and calculate that you owe them $32,000. Do you see what is happening here? There is a gap of $7,000 between what your automobile insurance company is going to pay you, and what the car company wants!
This is the reason why most auto owners need to get gap insurance. If they do, they would not have any problems when this unfortunate situation happens to them. If they do not, they might need to get two jobs, or postpone that vacation to Hawaii.
Gap insurance is not always for everybody. Depending on the payment scheme or automobile insurance policy, you might not need it at all. However, it always helps to ask an insurance agent or loan officer, because as you have seen, it pays to be prepared.