Is The Gap In Your Car Loan Insured?

Adding a teenage driver to your auto insurance policy can impact cost. Learn how to put your teen behind the wheel safely and affordably.

Is The Gap In Your Car Loan Insured?

14 January 2016
 Categories: , Articles


If you are getting ready to buy a new car, you have probably already factored the payments into your monthly budget. You may not mind making these payments in exchange for enjoying your new car. But how will you feel if you have to continue to make a payment after your car is stolen or wrecked? This could easily happen if you do not have gap insurance. Understanding what gap insurance is and who it benefits may keep you from making payments on a vehicle you no longer have. 

What Is Gap Insurance?

Did you know that as soon as you drive your new car off the lot you will lose approximately 11% of its value to depreciation? Unfortunately, this is not a one-time event, and as the depreciation continues you will lose approximately 25% of your vehicle's value in the first year. Once your car is three years old it is worth approximately 46% less than it was when it was new, and at the five year mark your value will be 63% less. 

Unfortunately, these are the values that your auto insurance will use if they have to reimburse the lender for your car. They could care less how much you actually owe on your loan.

Guaranteed Asset Protection, or GAP insurance is designed to cover the difference, or the gap, between what your insurance company is willing to pay for your vehicle and what you owe the bank. Some policies will even pick up the cost of your deductible. Unlike the rest of your car insurance coverage that can be set up on a monthly payment, GAP insurance is most often sold and paid for upfront, and is often financed along with the price of your vehicle. 

While this type of insurance has often been seen as a means for the car dealer, finance company, or your insurance company to make extra money, it is actually very valuable coverage in certain situations. But is it right for you? This depends on several things.

Who Needs GAP Insurance?

If you are able to pay cash or make a sizable down payment on your vehicle, there is a good chance that you will not need GAP insurance. This is because what you owe on your vehicle will always be less than what your vehicle is valued at. But this means the opposite is true.

You may need GAP insurance if you make a low down payment on your new vehicle. This is because the amount owed will usually exceed the vehicle's value for the first year or two. To decide if this is right for you look up your vehicle's value using Kelley Blue Book, or a similar online guide.

Compare this value to your loan amount to get an idea of how much you would owe if something were to happen. If this amount exceeds what you would be able to comfortably pay, you will want to invest in GAP insurance.

You may need GAP insurance if you have rolled negative equity from one vehicle loan into a new loan. This will cause you to immediately be upside down or underwater in your new car loan. Which means that you will immediately owe more than your vehicle is worth. 

You may need GAP insurance if you finance your car for an extended period of time. The longer you finance your vehicle, the more you pay in finance charges, and the less money that comes off of your principal balance. The average car loan is now a little over 62 months long, but there are auto loans that can be financed as long as 72 months. 

You may need GAP insurance if you finance your vehicle at a high interest rate. Although many lots will offer loans that will allow most people to purchase a vehicle, some of these can come with some pretty hefty interest rates. If you accept one of these higher rates, more of your payment will go towards your finance charges and less will go towards your principal balance. This could create a substantial gap between what your vehicle is worth and what you owe.

GAP insurance can be a great investment and could possibly keep you from financial ruin if something were to happen to your vehicle. If you choose to invest in it, consider purchasing it directly from your auto insurance agent instead of from the dealership. Not only will you get a better rate, but all of your insurance policies will be at one location. Contact a company like Northeast Insurance Agency for more information.

About Me
adding a teen driver to insurance policies

Adding a teenage driver to your auto insurance policy can have a very serious impact on the cost of your premiums for the year. What is the best way to go about adding a teen to your insurance policy while ensuring that he or she and the other drivers on the road and your vehicle are fully protected? My blog is all about your teenage driver. You will find tips for reducing the cost of adding your teen and tips for keeping your teen driver safe while out on the roads without you watching carefully. It is my hope that what I have provided will assist in helping your teen driver get behind the wheel safely.

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