If you have taken out an auto loan or lease before, you may have been recommended gap insurance. Gap insurance, or gap coverage as it is called sometimes, is essentially a debt termination agreement you purchase to cover the cost of totaling a loaned or leased car. Sometimes accidents happen, and sometimes they are particularly bad. If you total a car, there is no way to repair it, and if you have collision insurance on your policy your insurance company reimburses you for the cost of the car. The amount you are reimbursed however is the value of the car at the time of the accident. When you lease or loan, you are paying for the value of the car when you first get it. It is highly likely your car would have depreciated, or lost value, significantly by the time you total it. The difference between the value of the car when you bought it, and the value at the crash is the ‘gap’, and gap insurance pays for it.
Should You Get Gap Insurance?
Not everyone needs or should have gap insurance. If you completely own the car you drive, there is no need for gap insurance. Only those who finance or lease their car should have gap insurance, and even amongst those drivers, only a certain few should buy gap insurance. Gap insurance is meant for drivers who take out a loan that is close to the value of the entire car, take out a long loan/lease, do not put any down payment and/or your car is worth a lot of money. If one or more of those conditions apply to you, you should strongly consider gap insurance. The reason being, all of those profiles make it likely for a driver to be ‘upside down’ on their car payments.
To be ‘upside down’ on a car payment means you currently owe more than what the car is actually worth. That may seem counterintuitive, after all, how can a loan or lease become worth more than the car? The answer is depreciation. New cars can lose as much as 30% of their value in the first year. If you have a five year loan on the other hand, you likely would have only paid off less than 20% of it within a year. Simply, your car loses value faster than you can pay back your lease or loan. As time goes on that gap widens. Drivers with a large loan close to the value of car make it more likely to be upside down. As well, if you take a long loan, your monthly payments tend to be smaller, meaning you are paying back your loan slower.
Get Gap Car Insurance!
For the lowest rates on gap car insurance contact the Farnsworth Agency today by calling us at (541) 318-8835 or click here to connect with us online