Equity Vs. Gap Insurance: What Car Owners Need To Know

What's the Difference Between Vehicle Equity and Gap Insurance?

Vehicle equity and gap insurance are two very different things. Vehicle equity refers to the difference between the current market value of a vehicle and the amount owed on any loans or leases taken out to purchase it. Gap insurance, on the other hand, is an optional form of financial protection that covers the gap between the amount owed on a car loan or lease and the vehicle's market value in the event of an accident or theft. In other words, gap insurance protects the borrower from having to pay off a loan or lease for a vehicle that has been damaged or written off.

When is gap insurance worth it?

Gap insurance is worth it in several scenarios. Firstly, if you made a small down payment on your vehicle, gap insurance is recommended. This is because a small down payment may result in you owing more on your car loan than the car is worth, creating a "gap". Gap insurance is also worth considering if you have a long finance period, as this increases the likelihood of your car depreciating to a value below the amount you owe.

Additionally, if you purchased a vehicle that depreciates quickly, gap insurance can be beneficial. Certain vehicles, such as luxury sedans or SUVs, may lose value at a faster rate. In such cases, gap insurance can protect you from financial losses. Furthermore, if you rolled over negative equity from an old car loan into your new loan, gap insurance can help cover the difference.

It's important to note that gap insurance is typically not needed if you made a substantial down payment (generally 20% or more) or if you're paying off your car loan in a short period (less than five years). In these cases, the likelihood of owing more than the car's value is reduced.

Overall, gap insurance is worth considering if you want protection against potential financial losses in the event of your vehicle being totaled or stolen, especially if your vehicle is at risk of depreciating below the amount you owe.

When do you need gap insurance?

Gap insurance is a good option in the following circumstances:

• You're leasing your car: Lenders may require gap coverage on leased vehicles.
• You made a lower down payment on a new car: If your down payment is less than 20% of the sale price, you could end up with negative equity in the vehicle.
• You have a longer financing term for your vehicle: The longer your vehicle is financed, the higher your chance of owing more on the vehicle than it's worth.
• You want to protect yourself against depreciation: Some cars have a higher depreciation rate than others, so calculating the average depreciation for your car could help you determine if you need gap coverage.
• You have a loan rollover: If you owe more on your loan than your car is worth at the time of renewal, gap insurance can help protect you against the negative equity.

Gap insurance is not required by any insurer or state, but some leasing companies may require you to purchase it. When purchasing a new car, some dealerships may automatically add gap insurance to your loan — however, you can decline this coverage. Check your current car insurance policy and car lease or sale documents to find out if you have gap insurance.

How does gap insurance work?

Gap insurance is an optional, additional coverage that can be purchased on top of standard auto insurance. It covers the difference between the amount owed on a car loan and the amount paid out by the insurance company in the event of the car being stolen or totalled.

For example, if you owe $25,000 on a car loan and your car is totalled, standard insurance will pay out the current value of the car, let's say $20,000. Gap insurance will cover the remaining $5,000 that you owe on the loan, minus your deductible.

Gap insurance is intended to protect drivers from depreciation. As soon as a car is purchased, its value begins to decrease, sometimes significantly. This depreciation can leave a gap between what is owed on a loan and the car's value. Gap insurance covers this difference, ensuring the loan can be paid off in full.

To qualify for gap insurance, you must have comprehensive and collision coverage on your policy. Gap insurance can be purchased from car insurers or dealers, and some lenders or leasing companies may require it. It is typically much cheaper when purchased through an insurer rather than a dealer, and it can often be added to an existing policy.

Gap insurance will cover the difference between what is owed on a car loan and the amount paid out by the insurer in the event of a total loss of the vehicle. This includes if the car is stolen and not recovered. However, gap insurance does not cover engine failure or other repairs. It also does not cover injuries, death, or funeral costs resulting from an accident.

When the loan balance is lower than the value of the vehicle, gap insurance is no longer necessary and can be dropped from the policy.

How much does gap insurance cost?

The cost of gap insurance depends on where you purchase it. If you buy gap insurance from a dealership, it can cost hundreds of dollars a year. Dealerships typically charge a flat rate of $500 to $700 for gap insurance, which is added to your loan and accrues interest.

However, if you add gap insurance to an existing car insurance policy, it will only cost around $20 to $60 per year. This option is much more affordable, only increasing your comprehensive and collision insurance costs by about 5% to 6% on average.

If you want to buy a standalone gap insurance policy, you can expect to pay a one-time fee of $200 to $300.

Where can you get gap insurance?

You can get gap insurance from a few different sources, depending on your preference.

Firstly, your car dealer may offer to sell you gap insurance when you purchase your new vehicle. However, this is usually a more expensive option, as the cost of the coverage is often bundled into your loan amount, meaning you'll be paying interest on your gap insurance.

Secondly, you can get gap insurance from your auto insurance company. Many car insurance companies offer gap insurance, and it is typically cheaper than buying it from a dealer. You can add gap coverage to an existing car insurance policy or a new policy, as long as your loan or lease hasn't been paid off.

Thirdly, some auto lease deals build gap coverage into their pricing. So, if you're leasing a vehicle, gap insurance may already be included in your payments.

It's worth noting that gap insurance is usually only available for brand-new vehicles or models that are less than two to three years old. Additionally, you must have both collision and comprehensive coverage before you can purchase gap insurance.

Frequently asked questions