Understanding the World of Gap Insurance
Preparing to purchase a brand-new vehicle? If so, we’ve got a couple of questions for you:
1. Are you rolling over an old car loan to the loan on a new car?
2. Are you financing for five years or more?
If you answered yes to either of those questions, you may want to consider purchasing Gap Insurance. Now you probably have a question for us – What exactly is Gap Insurance and how will it protect you? The simple answer is, it’s something you should consider before completing the purchase of a brand-new vehicle. Here’s why: Almost all vehicles lose 20% of their value within the first year of ownership.
At the time a car is considered totaled, meaning the damage to the vehicle is more than the car is worth from a covered loss, Gap Insurance gets activated. It is meant to cover the difference between what your vehicle is currently worth (Actual Cash Value) and the amount you really owe to the bank. If your vehicle has a depreciated value equal to less than what you owe on the loan, without Gap insurance to help pay for the difference, you are responsible for the difference. In some cases, this discrepancy could be thousands of dollars, which would become your liability.
Let’s say you take out a loan of $30,000 for a new car. Later, the car is totaled in an accident and the ACV on the car is only $20,000. You currently owe the bank $25,000. It is your responsibility to cover the $5,000 difference from what the car was worth at the time of the covered loss. Also, keep in mind it does not matter who is at fault in the accident, it’s your responsibility to satisfy the bank loan.
If you are financing for less than five years or putting at least 20% down for the down payment of the new vehicle, Gap Insurance may not be necessary as long as it is not a vehicle that depreciates faster than average. You can check out the average value of your vehicle at any time with Kelley Blue Book at kbb.com. In most cases in New York State, Gap Insurance can be purchased at the time the new vehicle is purchased and stays with the original owner for the length of the Understanding the World of Gap Insurance loan on the vehicle. It is usually inexpensive and is added to the monthly payments. Keep in mind that if you lease a vehicle, you will most likely be required to purchase Gap Insurance.
Got questions? Have your auto insurance reviewed and get help deciding what coverage is best for you. Contact our Insurance Agents at 866-222-0937 or AAA.com/Insurance.