New car purchases are fraught with enough anxiety; being unprepared for events that could leave you upside-down in your new car loan is an unnecessary risk. When investing in a new car or car lease, gap car insurance is a solid purchase that eliminates this problem. When a car is totaled or stolen, gap insurance pays for the difference between the actual cash value (ACV) you receive from your insurance company and the outstanding value of your car loan. However, gap car insurance goes into effect only when your car is a total loss due to theft, flood, accident, tornado or other disasters. Minor claims on your insurance are paid for by your regular car insurance coverage; the goal with minor accident insurance payouts is to get your car repaired and back on the road. These minor claims do not deal with the car's ACV. Therefore, Gap coverage is not involved.
Why do you ever face a "gap?" The minute a new car leaves the sales lot it begins to depreciate dramatically. Within the first few months of a car's life on the road, it can lose as much as 30 percent of its initial value - what you actually paid for the car. Consequentially, there can be a number of months when your outstanding car loan is much higher than the car's ACV. Several scenarios exist when regular car insurance should be augmented with gap insurance - when you lease a car, when you roll outstanding debts from older cars into your new car loan, when you pay a small down payment or when the auto loan you have taken out is longer than four years.
Some car insurance policies will automatically cover gap insurance; always check your present policy before purchasing gap coverage. Also, some states require that lease contracts include this coverage. If, after checking, you still need gap coverage, your present insurance company often can provide the policy. You also can shop around; gap coverage does not need to be purchased from the same company as your basic collision and comprehensive coverage. Some car dealers will provide a gap insurance option when you purchase your car. Do not rely on the dealer as your only source, however. Make sure to compare different options to get the best value.
Gap insurance becomes a non-issue once you make enough payments to eliminate the "gap" between the car's worth and the outstanding loan. Until that point, you need this coverage. Even though it does not come into play with smaller claims, Gap insurance is a lifesaver. The last thing you need after an accident is to be paying the bank for a car that no longer exists.