GAP Insurance 101
In the early 1980’s the loan or lease payoff coverage type of insurance was created because of the protection of consumers based upon buying and market trends. This is also called or known as GAP coverage or GAP insurance. Basically this type of insurance is for the protection of consumers when a gap exists between the actual value of their vehicle and the money owed to the bank or leasing company of the car. It also provides coverage during the whole duration of the car loan.
An upside down or negative equity happens if the amount owed on the car loan goes beyond the value of the vehicle itself. This is because of the quick decline of cars directly right after purchase. With newer models coming in and out of the market, you will not be surprised that just after 6 months of purchasing your vehicle; it will be priced significantly lower. Most consumers’ purchase a car via car loans that naturally gains interest. So just in case you have purchased a car at a certain time where it is priced higher, the interest would be higher as well. Now once the car had depreciated based on the current market rate, sometimes your loan is even higher than the actual cost of the car.
With an upside down equity, if the vehicle is damaged beyond repair, this means that you will still have to pay a big amount for the loan. This is where GAP coverage comes in very handy, if there is a gap in the actual value of the car and the amount of money owed to the bank or leasing company. It is needed if you are expecting to owe more on the car loan than the car is worth for. What it does is it aims to pay for that gap and the deductible on the primary insurance policy. Most auto-dealership offers this type of insurance in a competitive rate which can be added in the car loan that will give protection and coverage for the time that you are still paying for the loan.
An upside down equity happens because some consumers are not able to afford a significant amount of down payment plus the car that was bought was rapidly depreciating. It could also happen if you are paying for high interest rates or if there are other expenses in the car loan like when you owe money with the previous car owned or when you trade in.
GAP insurance is also common when you are renting or leasing a vehicle. Even though you do not own the car, as a renter you are still responsible for the car if it is totaled or worst stolen. Some states like New York, even requires lenders of rental cars to add GAP insurance cost to the amount of the lease itself. So in reality, the price offered for rental cars quoted by the dealer includes GAP insurance. However, you have to be careful about this because some would actually use it as a way to get more money from lenders. What these dealers do is add and offer GAP insurance at an additional price or as an extra cost on top of the monthly payment even if it is required by the State to include the GAP insurance on the total price.
Knowing that such insurance exist, one should be able to use this for our advantage especially before applying for a car loan or before taking advantage of car financing. As a consumer, it’s wise to take advantage of such offer for future use and for less hassle in the future. We will never know what will happen in the future and we should always be prepared for it.