What is Gap Insurance?

Gap insurance, or guaranteed auto protection, is one of the more important terms in the automobile insurance business. If your car is damaged or totaled in an accident or if has been subject to events like theft or vandalism, gap insurance will cover the difference between the actual cash value of your car and the insurance that your provider will pay to replace your car.

Why this discrepancy in car costs? It has something to do with a concept called depreciation. The simple fact is that once you drive your brand new car off the dealer’s premises, the car becomes “used” and therefore does not have the same cash value that it did when it was still just sitting in the showroom. Hence, if your car is wrecked in an accident or stolen, the compensation you receive from your insurance company may not be enough to pay off the financing plan for your new car. If you don’t have gap insurance, you’ll have to pay your lender the “gap” between what your insurance provider gives you and the actual cost to replace the car.

Gap insurance has become a standard option for new-car buyers, although it is available for some older vehicles. Some leased cars also come with this type of insurance, but you will need to check with the dealer since each lease may come with different conditions. One does not have to go to a financial institution to get gap insurance because many automobile dealers themselves are authorized to sell this product to consumers nowadays. However, take note that gap insurance offered at dealerships may come at a higher premium than that sold by insurance companies.

Premium rates can vary according to several factors, such as the length of your car loan and the type of vehicle to be purchased. You can get gap insurance by paying a one-time premium or you can choose to have it included your car loan. The premium is generally reasonable, up to four or five percent of your car’s sticker price. For many new-car buyers, gap insurance is a tool that can give them peace of mind, knowing that making additional loan payments is not something they will have to deal with in case of a total wreck or car theft.

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