Standard auto insurance policies won’t pay out what you paid for the car. Instead, they cover the actual cash value (ACV) of the car. In the event of an accident, your insurance settlement will be the actual cash value at that time, minus your deductible.
For example, if they determine your car is worth $5,000 and you have a $500 deductible, your payout will be $4,500.
If you buy a new car, its actual cash value will quickly depreciate. If you’re in an accident that totals the car, you may get stuck paying thousands out of pocket to pay off your loan. That’s where GAP insurance comes in—it covers the cost between the loan amount and the car’s actual cash value.
There are a few things about GAP coverage that you may not know that could save you a ton of money.
- The longer the terms are on your auto loan, the more likely you are to need GAP coverage. The average term on a new car-loan is now a record 68 months.[i] Some extend even longer. Remember, the smaller the down payment and the longer the loan repayment, the more likely you are to benefit from GAP coverage until you’ve paid enough on the car loan to only owe its actual cash value.
- You may already have GAP insurance. There’s a good chance that if you bought a newer car, you also purchased GAP insurance. Check your policy to see if you’re already covered.
- Cancelling GAP coverage once you have equity in your car could save you up to 20% on your auto insurance. Check with your insurance agent to get the actual cash value of your car. You may have enough equity in your vehicle to cancel GAP coverage and save yourself some money
According to the Insurance Information Institute (III), GAP insurance is wise to consider if:[ii]
- You’re buying a new or nearly new vehicle.
- You’re financing it for 60 months or longer.
- You made a small (or no) down payment.
- You rolled over negative equity from an old car into the new one.
- You’re buying a car that depreciates more quickly that others.
- You’re planning to drive a lot of miles.
- Your loan terms are at a high interest rate.
If you have questions about whether GAP coverage is right for you, reach out today!