Gap insurance fills the gap between what your insurance company pays for accident or theft, and what you owe on an existing car loan.
$$$$$$$ CURRENT VALUE $$$$$$$ $$ THE GAP $$
$$$$$$$$$$$$$$ LOAN AMOUNT $$$$$$$$$$$$$$$
Car insurance pays out your car’s current value. Because cars lose value quickly, you may find yourself in a situation where you owe more on loan than what the car is actually worth — for instance, you buy a $40,000 car and in one year it is valued at $32,000, but you still have $35,000 left on your loan. Gap insurance covers that $3,000 difference.
When you might need gap insurance
Consider buying gap insurance for your new car or truck purchase if you:
- Made less than a 20% down payment
- Financed for 60 months or longer
- Leased the vehicle (carrying gap insurance is generally required for a lease)
- Purchased a car that depreciates faster than the average
- Rolled over negative equity from an old car loan into the new loan
Gap insurance is an optional, add-on coverage which typically adds on around 5% of your total car insurance bill.
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