You have just settled a car loan for a $20,000 car with a down payment of $4,000. You happily drive off, confident with the auto insurance company you’re with that they will take care of everything in case something comes up, be it theft or wreckage.
But did you know that your car’s value has just depreciated by 20 percent the moment you went home in it? And although your auto insurance will pay you the actual cash value of your car, you have to consider that it will not be enough to cover the remainder of what you owe on your loan. Remember, the car’s value has already started to depreciate when you first left with it, and your lender will always hold you responsible for paying the whole remaining amount of your loan. So what happens to the difference of the actual cash value of your car and the amount left in your loan? This could mean trouble for you and leaves you scrambling to look for money to cover that amount, which could turn out to be hundreds of dollars, even thousands, and eventually may even affect your good credit history.
This is where Gap insurance comes in. Gap is so called because it is the difference between the amount left on your loan and the actual cash value of your car. It is important then for you to have it insured as well and not only your car. Your having paid the down payment of $4,000 on the $20,000 car loan makes you an ideal candidate for Gap insurance. The following example illustrates the importance of Gap insurance:
The car is worth $20,000. Having paid $4,000 as its down payment, your loan balance is $16,000. A year later, the car is totaled. Your auto insurance company decides to pay for $13,000 as settlement, which is of course $3,000 short of the balance of your loan. Plus, with a deductible of $500, a final $12,500 settlement is reached. Gap insurance then pays $3,500. (However, certain terms may apply, like your financed loan amount must not exceed or at least be equal to $100,000 or the loan term is not more than eighty-four months, etc.)
See how you can rest easy with Gap insurance? For you then to have peace of mind with regard to one of your necessities in life, auto insurance must come with Gap insurance.
