What exactly is Gap insurance and is it something we really need? Finding ways to save money is something that we are all looking for. The recessions and slow recovery has us all spending our money wisely. It's just not smart to pay too much for anything, especially car insurance. But maybe, when you picked your policy you overlooked something.
You are mandated to buy comprehensive auto insurance if you financed your can through a bank or from the dealer. You may think that you have everything covered in that case. That is not necessarily true. If you lease a car, often the leasing company requires Gap insurance. Why do you think they require that?
Gap insurance pays the difference between the value of the car when an accident results in the total loss of the car and the outstanding balance on any financing. For leasing companies, this is the difference of how much the car depreciated and what is left on the lease. For the person who purchases a car, the amount paid by gap insensate is the difference between your loan balance and the depreciated value at the time of the accident.
Cars depreciate quickly. The old adage that it drops half its value once you leave the lot is a bit of an exaggeration, however, the depreciated value can be quite significant. The average car depreciates 20% in the first year, depending on the make and model it can be as much as 35%.
Consider this, if you buy a mid class sedan modestly accessorized for $30000, and finance $27,500. Leaving the lot, the value drops by 8.5%, then depreciates another 20% the first year. You get into an accident after one year and the car is totaled. You have only paid $6137.16 (12 payments of 511.43 @ 4.4% on five-year loan). The insurance company valued the car at $22,200. You have no car; you pay the bank with your insurance check, plus another $2000 of your own money. Gap insurance would cover the difference and that $2000 out of your pocket could go towards another car.
When you are looking for cheap auto insurance think about all the possibilities you need to cover. Sometimes a straight policy isn't enough. When getting auto insurance quotes, be sure to ask about gap insurance coverage. Often gap insurance is cheaper from your insurance company than from the bank or dealership. Check for quotes on this site.
