GAP insurance covers the ‘gap’, or difference, between the actual cash value of your car and what you still owe on your loan or lease in the event your vehicle is deemed a total loss due to an accident.
There are two ways of getting GAP coverage. The first is by buying it through the dealership where you purchase or lease your vehicle. The second is by adding the coverage to your auto insurance policy. Purchasing this coverage through your insurance company is typically less expensive than purchasing it through the car dealership.
Who should buy GAP insurance? We recommend that anyone with a loaned or leased vehicle should consider this important coverage. Unless you own your car outright or have a lot of equity in it, you could face a financial hardship without GAP coverage. Auto insurance is designed to pay for the actual cash value of a vehicle, and cars diminish in value the moment they are driven off the lot. Therefore, new buyers often drive away in new cars owing more on the loan or lease than the car is actually worth.
A scenario to put things into perspective:
If you purchase a brand new vehicle and take out a loan for $28,000, the moment you drive the car off the lot, the car is worth less than you paid. If you total your vehicle two months later, the insurance company may only be willing to pay $19,000 for it. However, you still have an outstanding balance on the loan of $26,000. That leaves a $7,000 shortfall that can only be covered by GAP insurance.
Consult with your insurance agent to see if your current insurance company offers GAP insurance. We can also guide you when you are purchasing a vehicle about whether or not this coverage is a wise investment for your specific needs. Give us a call at (401) 723-8510 or visit us online.
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