Gap insurance is auto insurance that you can buy to protect yourself if you total your car and the money you get doesn’t cover all your remaining loan or lease payments. GAP insurance can help if the amount you still owe on your car loan is more than the car is worth.
For people who fund or lease their cars, auto insurance is meant to help protect those investments. But sometimes, if you get into an accident, your auto insurance payout won’t cover the whole amount you still owe on the car.
Types of Gap Insurance
Below are the types of Gap insurance:
Return to Invoice Gap (RTI) Gap Insurance
RTI gives you extra protection if your car is labeled a total loss. It pays the difference between how much your auto insurance company settles for and how much you paid for the car in the first place.
Finance Gap Insurance (FGI)
This is possible for cars purchased through a type of agreement other than a lease or contract hire agreement. Like lease purchase, hire purchase, or personal contract purchase (PCP).
FGI covers the difference between what your car is worth on the market (which is what your auto insurance will cover) and how much you still owe on your loan.
Combined Return to Invoice Gap (RTI) Gap Insurance
By covering the difference between your auto insurance company’s settlement and either the amount you paid for the car or the amount still owed on your loan, Combined RTI gap insurance works for you in both situations.
Vehicle Replacement (VRI) Gap Insurance
VRI has pretty much the most coverage that most insurance companies offer. After your car is totaled, VRI insurance covers the cost of a brand-new alternative, giving you extra peace of mind.
VRI will pay the difference between how much your auto insurance company gives you as a settlement and how much a new car costs, even if the price has gone up in stores.
Return to Value (RTV) Gap Insurance
RTV will give you back the value of your car by paying the difference between what the insurance company offered and what it’s worth now. This will cover the loss of value of your car if it’s totaled.
How Gap Insurance Works
A lot of the time, people owe more on their car loans than their cars are worth. This is because cars lose value quickly. Carfax data shows that the average car loses 10% of its value in the first month of ownership.
If your car is destroyed, your insurance company will pay you back based on how much it is worth now, not how much you paid for it, how much a new one would cost, or how much you still owe on your loan or lease. This is where gap insurance comes in handy.
For instance, let’s say you got a car two years ago and still owe $20,000 on the loan. But your car is only worth $15,000 because of wear and tear. Your auto insurance will pay $15,000 if an accident or theft is so bad that your car can’t be fixed.
That $15,000 can go toward your car loan, but you’ll still owe $5,000 more than you have. This is true even though you don’t have a car anymore.
Gap insurance would cover the $5,000 “gap,” which is the difference between how much you still owe on the car and how much money you get from the refund.
When to Consider Gap Insurance
Gap insurance isn’t necessary for everyone who gets a car. Your decision will depend on your position and how much risk you will take with your money.
There are times when it makes sense to have this insurance and times when it doesn’t. Here are times when it might be a good idea to buy gap insurance:
1. Your down payment was less than 20% of the car’s price.
2. your loan or lease is more than 60 months.
3. You were behind on payments When you rolled your old car loan into a new one. The term for this is “negative equity.”
4. It is more likely for the covered car to lose value faster than other makes and types.
5. The difference between how much your car is worth and how much you still owe on your loan or lease is too much for you to pay
.
6. Because of faster wear and tear and a higher chance of an accident, you drive at least 15,000 miles yearly.
What Gap Insurance Covers
If you owe more on your loan than the car is worth and your car is destroyed, gap insurance can pay the rest.
Gap insurance is helpful if you have a loan on your car and wish to make a total loss claim, either because the fixes would cost more than the car is worth or because it was stolen. Your insurance company will only pay up to your car’s actual cash value (ACV) if you file a total loss claim.
Sometimes, the amount you still owe on your car loan can be more than its ACV. This is called “negative equity” or “upside down on your loan.” In this case, gap insurance, also known as loan or lease payoff insurance, helps you pay off the loan. Don’t forget that the loan doesn’t end when your car is destroyed.
What Isn’t Covered?
Gap insurance doesn’t cover the following usual costs:
- Your payment for car insurance.
- Late costs and payments that aren’t made on time for your car loan or lease.
- Deposits for safety.
- Extended warranties.
- Carry-over balances from previous loans or leases.
- Lease penalties for high mileage or excessive use.
- Fees for credit protection that are linked to the loan.
- A deposit on a new car.
Cost of Gap Insurance
Your premium may vary, as with all auto insurance, depending on your state, driving record, age, vehicle, and other variables. Gap insurance might be an endorsement that your insurer can apply to your existing coverage.
Additionally, car dealerships might provide gap insurance; however, its cost may surpass that of supplementing one’s current auto insurance policy. The cost of is affected by the following:
- The Insurance company you choose
- How much the covered car is worth in cash
- Your Age
- The state where you reside
- History of car insurance claims filed.
Conclusion
If you buy gap insurance, look at the different rates insurance companies, lenders, and car shops offer. Most of the time, one insurance company will have the lowest rates. If you hire a car, remember you’ll probably have to pay for gap coverage.
Usually, this cost will be added to your monthly lease payments. Some people do not need this insurance, though. You might have made a significant down payment or plan to pay off your car loan fast. But for people who buy gap coverage, it can help close the gap between worrying about money and being confident about their finances.
