Why Gap Insurance Is A Must Have Auto Insurance Option For Some People

What happens when you owe $23,000 on a car that’s totaled and your insurance company tells you it’s worth only $18,000? Well, it means that you’ll have to cover $5,000 to pay off the loan. Here’s where GAP insurance can help. Gap insurance covers that difference, so you’re not left to pay the rest.

GAP stands for Guaranteed Auto Protection and covers the gap between the actual cash value settlement from your insurance company in the event of a loss and what you owe on your vehicle loan or lease.

Most folks only get this type of coverage if they are putting little or no money down on their car purchase.
Many vehicle owners are "upside down," or owe more on their cars than they are worth because of depreciation. A car depreciates as soon as it leaves the lot, so most people owe more than what their car is actually worth, within a couple of minutes.

The reason a car depreciates so quickly is that the transaction has changed. Essentially, the sale goes from being a dealer-to-consumer transaction to either a trade-in or private-party sale. In this new transaction, you lose tax, license, registration and destination charges that you can't charge when reselling it.

All those elements create the instant depreciation, which is the most intense in the early years of vehicle ownership. A crucial point to remember: Even though your car is worth less down the road, you still owe the full value of your loan.

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