Gap/Loan Payoff Insurance

If you’re financing the purchase of a new car, gap/loan payoff insurance is a must-have coverage.  When you drive a new car off the dealer’s lot, you can expect the value to plummet by as much as 30 percent within three months.  This depreciation factor could lead to a very bad scenario if your car is 100 percent financed.

Covering “The Gap”

Suppose your new car is worth $40,000 and you’ve financed it at 100 percent.  A month after driving off the lot, you total your car in an accident where you’re at fault.  You think you’re completely covered because you have good comprehensive/collision insurance, but then you get some horrible news…  Because your car has depreciated by 30 percent, your comp/coll policy only pays out the vehicle’s fair market value: $ 28,000.  Without gap insurance, you’re now on the hook for the remaining $12,000 on your loan. 

In a nutshell gap/ loan payoff insurance will—in the event of your vehicle being totaled—cover the difference between your car’s fair market value and the value of the loan you’ve taken out to pay for the car.

Availability

Basically, gap insurance is for use specifically with new cars that are financed; it may not cover cars that are deemed total losses from causes other than collision, such as theft and natural disasters.  It’s possible your insurance company will include gap insurance automatically for a new vehicle.  Be sure to ask about this up front!

Price

The good news is that gap insurance is very affordable—often costing only $15 to $20 every six months. Gap insurance coverage is for new cars. Gap stands for car loan gap insurance. If your loan requires you to buy gap insurance, get gap insurance so that you’re covered if you ever need it.