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Understanding Gap Insurance and How it Works

Your ’92 Toyota Corolla coughs and sputters as it limps into the car dealership surrounded by a green and black fog. Unseen by you, there is a war battling between salespeople fighting each other to get to you first. Unlike the scene in your car where there is a sense of peace and tranquility because you know it will be the last trip, you’ll have to take in the old clunker.

Gap insurance
Gap insurance

Seven hours and four thousand dollars later, you drive away in your sleek, new 2013 Toyota Camry with a promise of a $450 a month for 48 months, a new full-coverage auto insurance policy, and a bumper-to-bumper warranty.

So you are totally covered, right?

Maybe not.

Law of Depreciation

When you drove off the lot, your brand new car loses as much as 40% of its new value because it goes from new to used. Depending on the amount of your down payment, you are likely now in an “upside-down” state of car ownership: Your vehicle’s actual cash value is less than the amount you owe on your car loan.

In this situation, if you had an accident that totaled your vehicle, your “full coverage” policy will pay up to the ACV (actual cash value) that is noted in industry publications such as the N.A.D.A or Kelley Blue Book, minus your deductible. Undoubtedly, you chose a high deductible to make your insurance premiums lower so you will first be responsible for either the $500 or $1000 deductible. Then you will be responsible to pay the remainder of the loan that is not covered by the ACV payment from the insurance company.

Winning the Law of Depreciation

1. Purchase Gap Insurance

Gap Insurance will do just that, bridge the gap between the ACV and the loan balance. The dealer probably has a relationship with a finance company that will offer you a Gap Insurance option; however, it would be in your best interest to explore the possibilities of Gap Insurance policies while you are seeking good insurance quotes for the new car.

Top insurance companies often offer the Gap Insurance product for their standard companies. You might discover that you can include Gap coverage for just a few dollars more when it is included in your auto insurance premium than buying separate coverage from an outside company.

2. Large Down Payment

If you make a large enough down payment, you end up with much smaller loan debt and your ACV is closer, or perhaps even less, than the loan amount. This is certainly a great option to save yourself a great deal of money through interest, loan amounts, and insurance costs. If you kept that ’92 Corolla to save up a great deal of cash for your new car purchase, you are pretty smart with your money.

3. Smaller Deductible

This isn’t necessarily the best tip by itself, but if you combine it with one of the other tips, you are saving yourself a great deal of out-of-pocket expenses. If you maintained continuous insurance coverage before the new car purchase, you are likely a standard auto policyholder unless your claims and driving record has challenges.

When you are price shopping your auto quotes, always pick low deductibles. Once you find the policy you like best, go ahead and compare the low deductibles with high deductibles. You might be surprised to learn that it isn’t much difference.

Gap Insurance is a valuable tool for protecting your financial obligations if you are like most Americans struggling to live from paycheck to paycheck. Ensure you are properly covered not just for damage protection but for loan protection as well.

Read also: Contents Insurance Frequently Asked Questions

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