What is Gap Insurance?
Purchasing new cars might be among the terrible investments globally since they lose from 15% to 20% of their market value the minute they are driven off from a dealers’ yard. The issue does not exempt old vehicles which are also prone to depreciation.
In case your automobile is acquired on credit, then improbably its worth is bound to be equivalent to or surpass the financing total throughout the credit period. Basically, a majority of individuals have higher credits than the car’s value (whether new or second hand) otherwise known as being upside down. Such situations come along with incredibly costly consequences in case of auto theft or totaling (repair cost is more than its value). That is where gap, a short form for Guaranteed Auto Protection insurance comes in to save the day.
Meaning of Gap Coverage
Gap refers to a non-mandatory auto insurance policy which that settles the “gap” or difference in what other physical damage covers clear and the debt on auto loan just in case you absolutely lose it. The worth of the automobile you buy always exceeds its resale price. Additionally, supposing you got an auto loan, then it is most likely you incurred unrecoverable extra costs like levies and registration charges.
With regards to the amount of up-front you make in financing your car, you can fall into the upside-down condition the next moment you drive away from the dealer. Such a situation can deteriorate further in case the vehicle is totaled, whereby the claim you filed to the auto insurance company is likely to bring you less than your loan balance.
Assume you made an up-front of 2,000.00 dollars for a car worth 27,000.00 dollars, immediately after buying it can drop to 19,000.00 or even 18,000.00 dollars with regards to how the auto insurance provider calculates.
The calculations take into account elements like;
- Guides in the industry,
- The condition of the car, and
- Value overviews.
Under circumstances when your automobile is totaled, and your physical damage coverage pays up to the limit, you remain with a debt of about 7,000.00 dollars on the car loan absolutely without the car. Therefore, your gap provider can clear that balance.
Cost of securing a Gap Cover
Costs depend on the insurers because they apply different rating criteria. However, ordinarily, gap premiums are about 5-6 percent of the other auto insurance damage covers.
Also, the premiums are likely to vary with significantly;
- Locality,
- The auto’s value, and
- Your record of driving,
Assuming your car’s cover cost for the physical damage is 500.00 dollars then gap coverage will probably cost you 25.00 dollars. Gap costs more when acquired from the auto dealer since it might feature into the loan with additional interest, but you can shop around for insurers with better deals.
Seven Factors to Consider when Opting for Gap Cover
Obviously, the gap cover doesn’t suit each car owner. However, there are several situations it can be worth securing such as:
- When the auto loan’s life extends beyond four years. The difference between your debt and the vehicle’s value tend to diminish faster with short repayment periods.
- When the car depreciates at a higher rate. Of course, cars do depreciate, but the rate matters.
- When you drive for high mileages; since the auto is prone to depreciating faster than those on low or moderate mileage.
- When the car is on a lease, gap coverage can prove to be highly advantageous. You need to note that the cover can still feature in your contract automatically.
- When a previous auto loan is rolled over into the new one then gap insurance is likely to save you much in case the unexpected happens.
- When your entire family depends on the same car it means you can hardly survive without it. Gap coverage can help fill in the “gap” left in case of totaling.
- When your up-front was under 20%, your debt might be higher than the auto’s value. In case of totaling or theft, gap cover will come in handy in balance clearance.
Final thoughts
Ideally, you shouldn’t go for gap coverage when you can guarantee that your auto loan’s ratio to auto’s worth is not likely to render you upside down in case of theft or totaling. On the other hand, suppose you don’t enough savings in your account waiting to clear a loan balance when the need arises, then gap cover is what you need.