What is 'GAP' Insurance


by Jacob Joseph - Date: 2007-01-19 - Word Count: 501 Share This!

GAP INSURANCE
Suppose you just got into an accident and wrecked your two-year old car. Are you assuming that you'll receive a full replacement at no cost since you have comprehensive auto insurance and full collision coverage? Unless you have 'GAP' insurance coverage, you are going to have to pay several thousand dollars out of your pocket in order to replace your totaled vehicle with the same exact car.

Outlined below are the specifics of what 'GAP' insurance is, how it works and what its benefits are.

What is 'GAP' insurance?
This type if insurance coverage covers you for the difference between the actual value of your vehicle when you got into your accident and how much you owe for your auto financing.

Why would one want 'GAP' insurance?
There are a wide variety of auto financing programs that allow you put no money down and make no payments for the first 6-12 months. These types of loan programs result in the consumer owing much more for their car than the actual value (being upside-down on your loan). This is because new cars depreciate tremendously the first two years.

'GAP' insurance offers you protection for your new car investment. Therefore, if your car is totaled in an accident or is stolen, you'll receive payment for the full value of the car!

How would I be effected if I don't have 'GAP' insurance?
Let's say you buy a new car for $50,000 and apply for 100% financing. After about one year, your car is going to be worth around $45,000 as a result of depreciation. However, you auto loan payments have lowered your financing amount by only $2,000. If you get into an accident, and don't have 'GAP' insurance, you'll receive a payment of $45,000 from your insurance company...and you'll still be obligated to pay $3,000 for the difference of the amount you owe and what the car is worth.

Can I utilize 'GAP' insurance when leasing a car?
If you are buying a new car, 'GAP' insurance is a must. However, you should also strongly consider purchasing 'GAP' insurance if you are going to lease a new vehicle. Many people will put no money down when leasing and factor all of the extra costs and taxes into their monthly payments. This results in them quickly becoming up-side down. It is very common for leases to have 'GAP' insurance factored into the price of the vehicle. Ask the dealer about doing this.

How can I obtain 'GAP' insurance?
Almost every auto insurance carrier will offer some sort of 'GAP' insurance plan. However, only new car loans and leases are eligible for 'GAP' insurance coverage.

Are they situations when 'GAP' insurance will not cover damages?
It is possible that your 'GAP' insurance policy will not reimburse you 100% of your vehicle's value of your car is stolen or damaged as a result of a natural disaster. Therefore, when shopping for 'GAP' insurance, make sure you ask potential carriers what are the circumstances when you will not be fully covered.


Related Tags: auto insurance, gap insurance

Jacob Joseph is a financial expert for http://www.starloanservices.com. At Star Loan Services you can get a free copy of your credit report.

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