When you buy a new car, the last thing you want to think about is the possibility of getting into an accident. But accidents happen, and if you get into one, your car could be totaled. In this case, your insurance company will pay the actual cash value (ACV) of your car, which may be less than what you owe on your car loan. This is where gap insurance comes in. But do you really need it?
What is Gap Insurance?
Gap insurance is an insurance policy that covers the difference between the ACV of your car and the amount you owe on your car loan or lease. If your car is totaled in an accident, your insurance company will pay the ACV of your car, which may be less than what you owe on your car loan. Gap insurance will cover the difference, so you don’t have to pay out of pocket for the remaining balance.
Gap insurance is typically offered by car dealerships and insurance companies. It can be a standalone policy or added on to your existing car insurance policy.
When Do You Need Gap Insurance?
Not everyone needs gap insurance. It depends on your financial situation and the value of your car.
If you own your car outright:
If you own your car outright and don’t have a car loan or lease, you don’t need gap insurance. Your car is worth what it’s worth, and if you get into an accident and it’s totaled, your insurance company will pay the ACV of your car.
If you have a car loan or lease:
If you have a car loan or lease, you may need gap insurance if:
- You owe more on your car loan or lease than the ACV of your car.
- You made a small down payment or no down payment.
- You have a long-term loan (over 60 months).
- You leased your car for a long term (over 36 months) or have a high-mileage lease.
If any of these apply to you, gap insurance may be a good idea.
How Much Does Gap Insurance Cost?
The cost of gap insurance varies depending on the insurance company and the value of your car. The cost can range from a few hundred dollars to over a thousand dollars.
If you’re getting gap insurance through your car dealership, the cost may be included in your car loan or lease payments.
FAQ
What is the difference between gap insurance and regular car insurance?
Regular car insurance covers damage to your car and liability for any damage you cause to other people’s property or injuries you cause to other people. Gap insurance covers the difference between the ACV of your car and the amount you owe on your car loan or lease if your car is totaled.
Can I get gap insurance after I buy my car?
Yes, you can get gap insurance after you buy your car. You can get it through your car dealership or through your car insurance company.
Is gap insurance required by law?
No, gap insurance is not required by law. It’s optional.
What happens if I don’t have gap insurance and my car is totaled?
If you don’t have gap insurance and your car is totaled, you’ll have to pay the difference between the ACV of your car and the amount you owe on your car loan or lease out of pocket.
Do I need gap insurance if I have a brand new car?
If you have a brand new car and you made a large down payment, you may not need gap insurance. However, if you have a long-term loan or lease, gap insurance may still be a good idea.
Conclusion
Gap insurance can be a good idea if you have a car loan or lease, owe more on your car than it’s worth, made a small down payment or no down payment, have a long-term loan or lease, or have a high-mileage lease. However, if you own your car outright, you don’t need gap insurance. The cost of gap insurance varies, but it’s typically a few hundred to over a thousand dollars. It’s optional and not required by law.
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