An Introduction to Gap Insurance - What is it and Why Do You Need It?
If you are reading this article, we have likely sparked your interest in gap insurance
. So what exactly is it? Simple put, it is a type of coverage which takes the view that your vehicle depreciates in value over time and covers you in the event you get in an accident and find that the value of your vehicle is less than the amount you owe. Without gap insurance, you would have to pay this difference out of your own pocket.To help illustrate this point, let us look at a concrete example. Let's say that you buy a brand new car for $25,000. Let us then say that six months down the road you get in a wreck when your vehicle is then worth only $18,000. If you made a down payment of $3,000 and made $250 payments per month during the time you had the car, you would've paid a total of $4,500. This means that you still owe $20,500 but since your vehicle is only worth $18,000, that is all the insurance company will pay you. This leaves a balance of $2,500 which you would normally have to come up with on your own to pay off your remaining debt. This is precisely where gap insurance can really come to your rescue.
Gap insurance can also cover you in other scenarios such as when you are about to trade in your vehicle for a new one and you owe more than what your current vehicle is worth. Years ago when I was moving overseas, I needed to sell my car pretty quickly. I took it over to a Car Max and they assessed its value to be $3,000. Unfortunately, I still owed around $4,500 which meant I had to cough up another $1,500 to settle my outstanding car loan. This was at a time when I was already strained financially. I sure wish I had gap insurance back then! The other great thing is that gap insurance also covers you if your car gets stolen.
The most important thing to keep in mind is that the more time that elapses the wider the gap becomes between the value of your vehicle and the amount you owe. This is why gap insurance is something you should definitely not ignore. How do you get it? A good place to start is by speaking to your current insurance provider. Many insurance providers do offer this coverage but the cost is going to vary from policy to policy. If you are lucky, your current policy may already include it. If not, be sure to do all your due diligence by evaluating policies and coverages from different providers and comparing rates to help ensure you don't pay more than you need to.
An Introduction to Gap Insurance - What is it and Why Do You Need It?
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