Although gap insurance is never required for auto loans and you should never believe anyone at a car dealership that tells you it is, there are times when choosing it can be the right decision.
We know because we’ve been involved in auto loans since 1992 here at Auto Credit Express. We even designed a website so that people with both good and bad credit can study such topics as FICO scores and file segregation as well as today’s topic, the benefits and drawbacks of gap insurance.
Understanding gap insurance
Until the last payment, your car really belongs to the lender.
If you’re involved an accident other than one involving a total loss before it’s paid off, full coverage car insurance will pay to repair any damage, less your deductible.
If you’re involved in an accident where the car is declared a total loss, the insurance company will typically pay its retail value (possibly less any deductible) at the time of the accident.
The only problem with a total loss accident is that if this situation occurs in the first half of traditional auto loans or even further along where small down payments are involved, the auto insurance settlement could be thousands less that the loan payoff.
If this happens, loan payments must continue until the remaining balance is paid in full.
Although this is a worst case situation, it can and has happened and this is where gap insurance coverage pays off. If you have it, the insurance company pays the difference between auto insurance settlements and the balance owed on auto loans (less the deductible – although if you weren’t at fault, in many states your car insurance company will cover that as well).
When you need gap insurance
In some cases, gap insurance is a waste of money.
• If you have a short-term auto loan (36 months or less) you will be in an equity situation in a short time.
• When a down payment on typical auto loans is 20% or more, there’s a good chance you’ll be in an equity position for most of them – especially with a term of 60 months or less.
However, in just about every other situation it usually makes sense to at least consider gap insurance.
Courtesy: Autoexpresscredit.com