Gap Insurance and Upside Down Auto Loan
What is a Gap Insurance?
The purpose of gap insurance is to pay for the difference between the value of your car and what you owe in car loan. For example, let’s say you totaled your car after 15 months. At this time, you have $23,000 left on your car loan, but the insurance company determines that your car only worth $19,000. As a result, you will have to come up with $4,000 on your own to pay off the financing company. However, if you have a gap insurance, it would pay the $4,000 difference to the financing company.
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Commonly Asked Questions about Gap Insurance
Where can I buy a gap insurance?
The best place to start is with your current car insurance company. Although your car dealership will try to convince you to buy a gap insurance through them, you’ll most likely pay a higher premium for the same coverage that you can get elsewhere.
Should I get a gap insurance?
Whether or not you should get a gap insurance is really up to you. However, there are a few factors that you should consider:
The amount you are financing. If you made a large down payment on the car, you may never be upside down and will not need a gap insurance. However, if you go for the $0 down payment deal, there’s probably a large gap between what you owe and what the car is worth.
The average depreciate rate of your vehicle. Some cars hold their values better than others. Depending on the car you purchased, the gap may be larger or smaller depending on the depreciation rate of that specific car. For example, Japanese and German cars depreciate much slower than American cars.
Your ability to pay for the difference in case the need arises. If you can cover the gap with your own money, you could very well skip the insurance and save yourself a few dollars each month. However, this is a calculated risk because even the best drivers do get into accident.
Is gap insurance required?
No, gap insurance is not required. However, the financing guy at the car dealership will do his best to convince you otherwise.
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