How Cheap Gap Insurance Can Cushion Your Protection

Cheap gap insurance is a type of automobile insurance that covers the difference between how much you owe on your car and how much the car is worth in the event of a total loss. It's like purchasing insurance for your automobile's loan. Many insurance providers offer cheap gap insurance for as little as $25 per year. However, it's up to a savvy consumer to find the best deal, and determine if gap insurance is right for them.

In Simpler Terms

Here’s an example of gap insurance in action. Let’s suppose you bought a new car nine months ago for $30,000. To buy the car, you got a zero-down auto loan, so you still owe $30,000 on the loan. However, because of the rapid depreciation that occurs to new cars, the car is now worth only $25,000.

If you total your car somehow (accident, fire, theft, flood, etc.), gap insurance covers the actual retail value of your car, not its depreciated value. In your case, regular insurance would usually only cover the depreciated value of your totaled car ($25,000). Without gap insurance, you would have to come up with $5,000 to cover the “gap” between your insurance payout and the cost of your loan. If you had cheap gap insurance, however, the $5,000 gap would be covered.

Who Needs Gap Insurance?

Not everyone should consider gap insurance, but here are a few scenarios where cheap gap insurance could be a smart option.
  • Your regular insurance policy does not cover the gap between the depreciated value of your car and your loan’s value.
  • Your car is brand new.
  • The make/model of your car has a history of rapid depreciation.
  • You have a zero-down, extended-term loan.
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