Gap coverage exists because of the difference between what a car is worth and what you owe on it, a difference covered in actual cash value and total loss.
Why loan balances exceed value
Vehicles depreciate fastest in the first couple of years, while loan balances fall slowly, especially on long terms. Put little down, finance for 72 or 84 months, or buy a model that depreciates quickly, and for a while you owe more than the car is worth. That difference is negative equity.
When gap matters most
If the car is totaled while you are upside down, the insurer pays the actual cash value and you still owe the lender the rest. Gap coverage pays that difference, so a total loss does not leave you making payments on a car that is gone. It matters most early in a loan and throughout most leases.
Gap vs new car replacement
These get confused. Gap covers the loan-to-value difference. New car replacement may replace a recently purchased, totaled vehicle with a comparable new one, within age and mileage limits, instead of paying depreciated value. Some drivers want one, some the other, and some both early in ownership.
Dealer gap vs policy gap
You may have been offered gap at the dealership, often rolled into the loan at a flat price. Gap added to your auto policy is usually inexpensive and adjusts as the balance changes. They are different products; if you bought dealer gap, it is worth comparing against adding it to the auto policy, and making sure you are not paying for both.
Continue the series
You are reading part 9 of How to Compare Auto Insurance Quotes Without Getting Burned.
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