Gap Insurance: Partial Payment Explained

Gap insurance is an optional type of car insurance that covers the difference between the value of a car and the amount the driver owes on their auto loan or lease if the car is stolen or deemed a total loss. Gap insurance is not required by state law, but it may be required by lenders and lessors. Without gap insurance, drivers are stuck paying the remaining loan or lease balance on a vehicle that they can no longer drive.

Gap insurance covers what is owed on a car after a total loss, whether that is the result of an accident or vehicle theft. However, gap insurance does not cover the driver's comprehensive or collision deductible.

If a driver has gap insurance and their car is stolen or deemed a total loss, their comprehensive or collision coverage will pay the actual cash value of their vehicle, minus their deductible. Their gap coverage may then pay the difference between their vehicle's value and the outstanding balance of their loan or lease.

Gap insurance covers the difference between the value of a car and the loan owed on it

Gap insurance is an optional form of car insurance that covers the difference between the value of a car and the loan owed on it. This type of insurance is useful if you owe more on your car loan than the car is worth. This could be because you didn't make a down payment, or because you chose a long loan term.

Gap insurance is especially useful if you lease your car or have a car loan. You are likely to need it if you have a car that depreciates quickly, such as an electric vehicle or a sports car, or if you have a long-term loan.

If your car is stolen or involved in an accident and is declared a total loss, your insurance company will pay the actual cash value of the car. This is the value of the car after depreciation, not the price you paid for it or the amount you still owe on your loan. Gap insurance covers the difference between the amount your insurance company pays out and the amount you still owe on your loan.

For example, say you bought a car two years ago and owe $20,000 on your financing agreement. However, due to depreciation, your car's actual cash value is now $15,000. If your car is completely written off as a result of an accident or theft, your car insurance policy will pay out $15,000. You can put that $15,000 toward your car loan, but you'll be $5,000 short of what you owe, even though you no longer have a car. Gap insurance would cover this $5,000 difference.

The cost of gap insurance depends on your state, driving record, and vehicle. You can buy it from your car insurance company or from a dealer, but it is usually cheaper to buy it from an insurance company.

It is required when the gap between the value and loan amount is significant

Gap insurance is an optional auto insurance coverage that applies if your car is stolen or deemed a total loss. It is designed to cover the difference between the value of a car and the amount owed on a loan or lease. This type of insurance is particularly relevant when there is a significant gap between the value of the car and the loan amount, protecting drivers from being left with a large bill for a car they can no longer drive.

When a car is totalled or stolen, standard insurance policies will typically only pay out the actual cash value of the car, which may be less than the outstanding loan or lease amount. This is where gap insurance comes in, covering the difference between the depreciated value of the car and the loan amount owed. This can be especially important for those who have made a small down payment (typically less than 20%) and/or have a long-term loan, as the loan balance may decrease more slowly than the car's value.

For example, let's say you buy a $50,000 car with a down payment of $10,000. Three years later, the car is worth $20,000, but you still owe $24,000 on the loan. If the car is totalled in an accident or stolen, your standard insurance policy will pay out $20,000 (minus your deductible), leaving you with a $4,000 gap. Gap insurance would cover this difference, ensuring you don't have to make payments on a car you can no longer use.

It's important to note that gap insurance is not always necessary. If the amount owed on the loan is close to the car's value, or you could afford to pay the difference, then gap insurance may not be worth the additional cost. Additionally, gap insurance is not required by law, although lenders or leasing companies may require it to protect themselves from car owners walking away from a loan or lease in the event of a total loss.

It is optional and not required by state law

Gap insurance is optional car insurance that covers the difference between what a car is worth and what the driver owes on their auto loan or lease if the car is stolen or totaled. It is not required by state law, but it may be required by lenders and lessors.

Gap insurance is intended to cover the "gap" between what a car is worth and what is owed on the loan or lease. This gap arises when a car depreciates faster than the loan or lease amount can be paid off. A new car loses about 10% of its value the moment you drive it off the lot, and it depreciates by about 20% within the first year.

When a car is totaled, standard insurance policies will only cover the depreciated value of the car, not the amount owed on the loan or lease. Gap insurance covers the difference, so that the driver is not stuck paying off a loan for a car they can no longer drive.

While not required by state law, gap insurance may be a good idea depending on your financial situation. For example, if you made a low down payment and have a large auto loan, or if you have a car that depreciates quickly, gap insurance can be a good idea.

You can purchase gap insurance from car dealers, lenders, or insurance companies. It is generally cheaper to purchase gap insurance from an insurance company, which may charge as little as $3 per month for coverage.

It is worth considering if you have a long-term loan or a car that depreciates quickly

Gap insurance is an optional auto insurance coverage that helps pay your car loan if your car is lost or stolen and you owe more than the vehicle is worth. It is worth considering if you have a long-term loan or a car that depreciates quickly.

If you have a long-term loan, you may owe more on your car than it is worth. In this case, gap insurance can help bridge the financial gap between the value of your car and the amount you owe on your loan. This is especially important if your car is totaled or stolen, as standard car insurance will only pay up to the current value of your car, which may be less than the outstanding loan amount.

Gap insurance is also worth considering if you have a car that depreciates quickly. Cars can depreciate rapidly, with the average automobile losing 10% of its value in the first month after purchase. If your car depreciates quickly, you may owe more on your loan than the car is worth. Gap insurance can help cover this difference.

To determine if gap insurance is worth it for you, you can use resources like Kelley Blue Book to estimate your car's value and compare it to your loan balance. If the difference between your car's value and the amount you owe on your loan is significant, then gap insurance may be a good idea.

Overall, gap insurance can provide financial protection if you have a long-term loan or a car that depreciates quickly. By covering the difference between your car's value and your loan amount, gap insurance can help ensure that you don't owe more than your car is worth.

It does not cover engine failure or repairs

Gap insurance is optional car insurance that covers the difference between the amount you owe on your car and the amount your car is worth if it is stolen or involved in an accident. It is important to note that gap insurance does not cover engine failure or repairs. This is because gap insurance is only applicable in the event of a total loss, meaning that the vehicle is either stolen or damaged beyond repair.

Engine failure and mechanical issues are not covered by gap insurance or standard car insurance. If you are seeking coverage for engine failure, you may want to consider purchasing mechanical breakdown insurance (MBI) or an extended warranty. MBI is offered by some car insurance companies and covers engine failure and other mechanical issues. However, it does not cover normal maintenance and wear and tear items like brakes.

Warranties typically cover engine failure and mechanical issues, but only for a specified period or mileage. There are two main types of warranties: bumper-to-bumper and powertrain. Bumper-to-bumper warranties cover most car parts and systems, excluding the bumpers themselves, while powertrain warranties specifically cover the engine, transmission, and drive axles.

In summary, gap insurance does not cover engine failure or repairs. To obtain coverage for engine-related issues, you may need to purchase additional insurance, such as MBI, or consider an extended warranty for your vehicle.

Frequently asked questions