Gap insurance a necessity for new car owners

Buying a new car is an expensive proposition, and it becomes more expensive once you see how much it is going to cost you to insure it. Unless you pay cash, and few consumers do, you are at the mercy of your lender when it comes to buying car insurance. Your lender essentially owns the vehicle, so they get to decide how you insure it and for how much. That being the case, your lender will pretty much insist upon comprehensive coverage. They want that vehicle protected no matter what happens to it - crash, fire, theft, act of God, tree falling on it, whatever. They want to make sure that no matter what happens, they will get their money back.

Oddly enough, there is one thing that lenders generally do not require to be covered by insurance - the gap. What is “the gap?” The gap is the difference between the amount you owe on a vehicle and the amount of money that the insurance company will pay for it in case of an accident. In many cases, the gap is minimal, but in situations where the vehicle is new or nearly new, the gap can be quite substantial. Often, when someone purchases a new vehicle, that car or truck depreciates some 25% or so the minute it drives off of the dealer’s lot. That’s a huge chunk of cash that simply disappears the minute the new owner drives the vehicle away. That is the very minute that the gap appears. A new $30,000 vehicle might be worth $25,000 just five minutes after the new owner takes delivery. And if that new owner gets in an accident on the way home, the insurance company will offer to pay $25,000 for it.

What about the $30,000 value? That’s gone, but if you put no money down, that’s the amount that you owe your lender. If your company is only paying $25,000 for the car, then you have to pay the extra $5000 yourself. That’s where gap coverage comes in. Most companies offer gap insurance as an add-on to their comprehensive policies. Gap coverage protects you in the event that the car is lost, totaled or wrecked before you pay down the amount you owe to where it equals the value of the vehicle. Gap protection isn’t particularly expensive, but not having it can cost you a lot. Should you get caught without it, you’ll end up owing the difference and having to come up with extra money with which to purchase another vehicle.

Lenders don’t require gap coverage, but smart buyers will make sure that their new car policy includes it. Many lease agreements include gap protection as part of the lease, but not all of them do. If you are leasing a car and you aren’t sure, check your agreement or check with your dealer. Gap coverage is something you don’t want to be caught without.

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