If your car is totaled in an accident, how much will your insurance pay? That depends on your coverage. And if you still owe money on your car loan, you’ll want to double check that coverage. Your regular car insurance may not cover the amount you still owe on the car if it’s totaled before the loan is paid off, so GAP insurance plays an important role.
GAP is short for “Guaranteed Auto Protection.” It’s function is to cover the difference between what the market value of your car was when it was totlaled, and what you still owe on your car loan. For example, if you total your car and the insurance company values it at $10,000, but you still owe the bank $11, 500, your GAP insurance will pay that $1,500 difference. Depending on your policy, your GAP insurance may also even cover your deductible.
While GAP insurance isn’t always required, it’s may be a good idea to carry it if you’ve taken out a loan on your car. Remember that your car’s value begins to drop the moment you drive it off the lot! Meanwhile your insurance company can only pay the actual cash value (ACV) for your vehicle after an accident. Without GAP insurance, the difference comes out of your pocket—which can get pretty pricey!
If you’re shopping around for a new car, shop around for auto insurance as well. Look for a GAP plan that offers other benefits, such as extra money toward your new car loan. Your insurance agent can help you choose the coverage that’s right for you.