Gap insurance covers the difference between what your car is worth and what you still owe on your auto loan or lease if the vehicle is totaled or stolen. Cars depreciate faster than most people pay them off, which means you can owe more than your car is worth for years after you buy it.
If your car is totaled, your auto insurer pays the actual cash value (ACV) of the vehicle. But if you owe more on your loan than the ACV, you are responsible for the difference — the "gap." For example, if your car is worth $18,000 but you owe $24,000 on the loan, you would owe $6,000 out of pocket after the insurance payout. Gap insurance pays that $6,000 so you are not stuck making payments on a car you can no longer drive.
Gap insurance is available through your auto insurer, your car dealership, or your lender. The cost through your auto insurer is typically the lowest — around $20 to $50 per year as an endorsement to your existing policy. Dealership gap coverage can cost $400 to $800 as a one-time charge and is often more than you need to pay.
Once your loan balance drops below the vehicle's market value, you no longer need gap insurance. This typically happens a few years into the loan, depending on your down payment and loan term. Check your balance against your car's value annually.
If you are financing or leasing a vehicle, gap insurance is a smart and inexpensive safeguard. At Truscott, we check your loan-to-value ratio and recommend gap coverage when it makes sense. Request a Truscott coverage review and we will make sure you are not exposed to an unnecessary financial gap.
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