So, you’ve been operating under the assumption that your car insurance would replace your car if it’s totaled by either giving you the amount you paid for it or by paying off the full amount on your loan. Well…okay, here’s the thing. Your car insurance would likely give you the actual value of your car, meaning the value of the car at the time that it was squashed.Have questions? Chat with us now.
That makes sense, right? But the problem can arise if you have a car loan. Cars depreciate in value – or lose their value – the second those wheels leave the dealership. And if you have a whopper of a car loan, your car might not be worth the amount of the balance you have left on the loan. (This is what we mean by being “upside-down”.)
Following us? We know it’s confusing.
Okay – so what that means is that your car insurance would only reimburse you for a part of what’s left on your loan. See the problem here? You’d only be able to pay off part of that loan balance.
But that’s why there is gap insurance – it can help you cover that gap between the loan balance and the amount you get from insurance if you’re in that upside-down situation. Clever name, right? (Okay, okay, it’s actually called guaranteed asset protection, but gap insurance makes way more sense.)
So, here’s the question – do you really need gap insurance? These are a few situations in which you might really want to consider it.
- You stretched your loan past 3 years and only put a small amount down. (The value of the vehicle might go depreciate faster than you can pay off the loan.)
- You took advantage of a zero-percent down payment deal.
- You leased your car.
(One last thing – gap insurance isn’t usually a thing for used cars. If you get a used car, you might want to put down a fairly hefty down payment or finance your loan for as little time as possible for your budget.)
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