Gap Protection For Car Loans – Do I Need It?
If your car’s value is less than the amount owing on your car loan, you may not be covered with your regular car insurance policy. Gap insurance covers the difference between the balance of your loan and your car’s value when it is stolen or damaged.
Do you need gap protection?
The first thing you need to do to find out if you need this insurance is to call up the lender that is considering the loan for your car. If you don’t have a lot of money to put down on the car you may need this protection. Also, if you are considering a car loan for an extended period of time such as 60 months, this protection may be necessary.
Some people transfer over the balance they have from a previous loan to the new car loan and this extra protection is necessary in such a situation. Basically, any buyer that is going to owe more money to the loan than the worth of the car will need gap protection.
What is gap protection?
Although it is commonly referred to as insurance, gap protection is actually a debt cancellation agreement. It’s a waiver that applies to the loan contract for the part that says you are required to pay the amount between how much your car is valued and how much you still owe on the loan.
An example
If something suddenly happens to your car, as a result of a natural disaster for example, and it is two years after you first purchased it, you will lose money by not having gap protection. Let’s say that you have a $500 deductible on your insurance, still have a $20,000 balance on your car loan, and the car has depreciated down to $15,000 when it is lost.In this case you would get paid $14,500 from the insurance company. Since you still owe $20,000 on the loan, the gap would be $5500.
Another term used for this situation is negative equity. You will still have to pay your car off on a monthly basis, even though it has been lost and you can no longer use it. This is not a situation that anybody would like to be in.
To figure out how much gap insurance you will need your have to take a look at how much equity will be accumulated and how much you expect your car to depreciate. This will help you figure out how big the gap will be and for how long.
Many lending institutions offer gap protection as well as your insurance company, your car dealer and online sellers. Each one will offer a different option and it is important to find out what they are first.
The dealer
When you have first purchased your car you can get your gap protection from the dealer while you are making your purchase. If you want to choose this option you’ll need to let them know right away. In some cases you may be able to get it later, but if you are purchasing a new car, once you take it off the dealer’s lot it is considered used.
Your car insurance company
While some insurance companies carry gap protection, others do not. You will have to call your insurance agent and find out if the company provides it. There is a chance that it is already covered in your current insurance policy, but it may not be enough. Remember that the gap protection cost will be relative to your car’s value. If you are purchasing an expensive car that gap will probably be bigger and you will need more coverage.
Once you have insurance you’ll have to keep track of when it is no longer necessary to have. There will come a point during your loan when the gap is gone between the car’s value and the balance owing on the loan. Once this time comes you’ll need to cancel the insurance or else continue to pay for something you really no longer need.
In most cases the same price is set for all customers that buy the same type of coverage. Don’t be afraid to shop around before purchasing the gap protection, however, since dealerships may charge more than other lenders.
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