Do you have a car loan? You Probably Need Gap Insurance
For many people in the United States, buying a car is not possible without a car loan. Indeed, cars can cost tens of thousands of dollars and saving enough to pay in cash can take years.
For drivers with auto credit, making sure they have the right auto insurance is especially important. One of the main types of auto insurance coverage that may be needed is called gap insurance. Many lenders require motorists to maintain spread coverage, but even when this type of insurance isn’t required, purchasing it might be a good idea anyway.
Gap insurance could protect against huge problems in the event of total loss
When drivers insure their vehicles, an auto insurance company usually pays for repairs to the car if something goes wrong. But there are circumstances when a car cannot be repaired because it is too damaged or because the cost of repairs would exceed the value of the vehicle. In other cases, cars are stolen, which means that an insurer would pay for the vehicle if it is not recovered.
When insurance companies pay compensation for a stolen vehicle or for a car declared a total loss, the insurer assesses the fair market value of the car. And this is the amount that the policyholder receives. The problem is that this fair market value is usually, if not always, less than the amount the insured paid for the car. This is because cars tend to lose value over time, especially if they are new models when purchased.
If a driver is only compensated for the fair market value of a vehicle, that amount can be much less than what the motorist owes on their car loan. For example, a driver might only receive $ 10,000 in compensation for a car that was declared a total loss but might still have an outstanding loan balance of $ 15,000.
This problem is especially common when motorists borrow a lot to buy new cars, make small down payments on their vehicles, or extend their loan repayment term over a long period of time.
Unfortunately, if a driver is paid less by an insurer than their car loan amount, the lender still expects to be paid the entire loan balance. This could leave the driver without a car and with an insufficient insurance check to pay off the entire loan. In this case, the motorist could be held personally responsible for repaying the balance of a loan for a car that he no longer owns.
This is where gap insurance comes in. It reimburses this balance so that the driver does not have to cover it out of his pocket. This could prevent serious financial damage to the driver, and it also ensures that the lender is protected – which is why most mortgage providers require it.
If you’ve taken out loans to pay for a vehicle, be sure to check and make sure that gap insurance is included in an existing auto insurance policy. If not, consider contacting an insurance agent or signing into online accounts to add this coverage and get the essential protection it offers.