Why You Need GAP Insurance
There’s nothing like that feeling of driving off a car lot with your dream car. You’ve saved your money, placed your down payment, been approved for your auto loan, and now you are a car owner. Congratulations! Your dream has become a reality. But something that isn’t so dream-like is the fact that each year, millions of cars are totaled in vehicular accidents. Even worse is that many drivers lose money when their cars are totaled because they don’t have GAP insurance. Many people don’t even know what GAP insurance is or why it is so important.
What Is GAP Insurance?
Simply put, GAP stands for Guaranteed Asset Protection and it is used when your car is totaled in an accident, but the insurance will not pay the full amount of what you owe on your car loan. Right now, you may be saying, “But I have full coverage. Doesn’t that mean that I’m covered?” The answer is no. An insurance company is not required to pay off the balance you owe on your car loan. They are only required to pay off the current value of the vehicle. Here’s an example of what that looks like:
Say you own a 2018 Toyota Camry. You bought the car for $24,000 and currently owe $20,000 on your car loan. Your vehicle was totaled in an accident, but the Kelley Blue Book value of your car is at $16,000. The insurance agency is only required to pay you $16,000, not the full $20,000 you owe on the car. This leaves you with $4,000 loss. If you have GAP insurance though, it should cover the remaining $4,000 so you are not coming out of pocket to pay back your car loan.
How Gap Insurance Helps You in A Car Accident
For most of us, being a car owner is an important goal once you hit your teenage years. It symbolizes adulthood and independence, but it also comes with risks. I’ve talked before about how dangerous Florida roads are and the importance of being insured, but even full coverage doesn’t cover everything.
Getting into a car accident is stressful enough but adding possible debt to the equation is taxing on the mind. Without GAP Insurance, there is no guarantee that you will receive the full value of your car. Because of this, if your vehicle is totaled in an accident, you may be left still paying a car note for a car you no longer can drive.
Factors That Increase the Need for Gap Insurance
You must keep in mind that if your car is totaled in an accident, your insurance company is only required to pay you the cash value of your car. Also, remember that the value of your car decreases every day that it is off of the lot. There are a number of additional factors that can decrease the payout that Kelley Blue Book or other vehicle valuation companies suggest. These factors are all more reasons to invest in GAP insurance.
Once such factor is rolling the loan amount from a previous vehicle. This is an option that many people use when trading in a car or other similar scenarios. One of the problems with this is that it decreases the cash value of the current car you are driving. If you have rolled an old car balance onto your current car, then you should definitely consider GAP insurance to ensure you are covered if your car is totaled.
Another factor that increases your need for GAP insurance is a high APR on your car loan. Recall that with a high APR, most of your monthly payment is going toward the interest you owe on the vehicle and not the actual principal balance. This means that it will take you longer to pay off the car loan and you can end up owing more on the car than its actual value.
Not many people know what GAP insurance is, but after reading this article, now you know it stands for Guaranteed Asset Protection and it covers you in the case where your car is totaled, and the cash value is less than what you owe on it. You also know the risk factors that heighten your need for GAP insurance and especially the need to have GAP insurance if you are a Florida driver.
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