When you lease a new car or buy with financing and a small down payment, the dealer's finance office will encourage you to buy gap insurance. If you pass on the dealer's offer and later decide that this type of insurance makes sense for you, it should not be a problem to buy a policy. Before shelling out hundreds of dollars for the coverage, check your options and avoid buying the insurance if you don't really need it.
What Gap Insurance Fills
Gap insurance covers the difference between the loan or lease payoff amount and what your auto insurance will pay if you total your car in an accident. Car insurance will only pay the replacement value, which is what it would cost to buy your car on the used vehicle market. The value of a new car typically depreciates much faster than the payoff balance on a lease or car loan declines. But if the car is totaled, the lender on the loan or lease will require a full payoff. A funding gap for the car owner occurs when the insurance payment for the car is less than the financing payoff. In the first few years of a lease or low down payment car loan, this gap can be thousands of dollars.
Check Your Lease Contract
If you are leasing your car, it is possible that gap coverage is included in the lease contract. An article on the Edmunds website notes that most leasing companies now include gap coverage in the lease terms. However, the words "gap insurance" will not be included in the contract, so read your lease agreement closely to determine what happens if you total your leased car in an accident.
Shop for the Lowest Price
When you purchase a car, the dealer's finance department can sell you a gap policy and roll the cost into your new loan, letting you pay for the insurance monthly. However, companies unaffiliated with the car dealer will sell you gap insurance after you buy a car. Because gap coverage is pretty straightforward insurance, collect several quotes and go with the one that provides the best value. Your current auto insurance carrier might be willing to add this coverage to your regular vehicle insurance policy.
Skipping the Gap
Gap insurance only works if you total the car and the insurance payment is less than the loan payoff amount. A larger down payment with a shorter-term car loan can reduce or eliminate the need for gap coverage. Saving more for a down payment or waiting longer to build equity in your current vehicle before you trade will give you a lower monthly car payment when you buy your next car and spare you the need for gap insurance. If you like to have a new car every few years, leasing with built-in gap insurance is one alternative.
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