Gap insurance provides protection when your vehicle gets totaled or stolen and your loan balance is more than the car’s cash value. The insurance company pays the difference between your car’s actual cash value and the loan balance.
Can you get gap insurance on a used car? Gap insurance is mainly for new vehicles, which quickly lose value. However, that doesn’t mean that you cannot secure a gap insurance policy on a used car. The gap insurance for used vehicles is called the loan/lease payoff program.
Like for new cars, gap insurance (guaranteed asset protection insurance) can provide psychological relief in knowing that you wouldn’t be liable for clearing your loan balance out of pocket. However, it is not necessary for all used cars.
This article discusses gap insurance for used cars in greater detail to help you decide if you need it. Let’s dive right into it!
What Is Gap Insurance for Used Cars?
Are you in a dilemma as to if you should get gap insurance? What is the purpose of gap insurance? An additional insurance coverage fills in the “gap” that may exist between the car’s actual value and your loan balance when an accident happens.
It is only one of the forms of car insurance policies, including comprehensive and collision insurance. For a new car, gap insurance covers the gaps in comprehensive coverage.
In essence, a comprehensive collision payout covers only the market value of your car. So, if you owe more on your auto loan or lease than what comprehensive and collision insurance covers, you need gap insurance to plug in the difference.
But does gap insurance cover anything on a used car? Is it even necessary? Yes, gap insurance is essential for a used car. Although it is perfect for new car owners, it works perfectly well for used vehicles.
Gap coverage is necessary when your loan or lease balance exceeds your car’s worth. If you buy a car costing less than $5,000 and pay for it in cash, you don’t need gap insurance.
How Does Gap Insurance Work?
Gap insurance works straightforwardly; you get gap insurance as you buy or lease your car. The car dealership may initiate the process, primarily the insurance provider. Alternatively, you may approach an insurance company for a better deal.
The good thing about insurance companies is that they have cheaper and better insurance terms than car dealerships. So, you may want to approach a reputable insurance company for gap coverage.
When your car gets totaled or stolen, comprehensive insurance covers the totaled car’s actual cash value. Any “gap” between the loan money and this cash value of your car means you owe money to the car dealership of the lender.
That’s where gap coverage on a used car comes in handy. It plugs in the gap, relieving you of any financial burden. The following illustrates how gap insurance works to provide relief to car owners.
Suppose you buy a used car at $15,000 with an annual depreciation rate of 11%. The car’s actual value at the time of purchase is $13,350. After an accident, the liability for clearing the loan balance still falls on you.
Once the insurance company has paid $13,350, you still need to add a gap insurance coverage or $1,650. That relieves you of paying the loan or lease balance out of pocket. However, some insurance companies may pay 25% of the value of your car, especially if it is a loan/lease payoff.
Is Gap Insurance Worth It?
You might be asking: “Is gap insurance worth getting?” Well, you’re not alone. Many people don’t understand the value of gap insurance, especially if they can afford to make timely loan payments. “Why would I need gap insurance?” they ask.
Before deciding whether or not you need gap insurance, you should consider what would happen when your car gets involved in an accident. How would the insurance company value your car when it is totaled?
In the ideal setting, the actual cash value of your vehicle would be more than the loan balance. After clearing the loan, the insurance company writes a cheque for the excess amount and sends it to you. in that case, and you do not need a gap insurance policy.
However, that’s hardly the case. Most insurance companies care about the actual cash value of your vehicle and not the loan amount. They determine it by considering the vehicle’s mileage, condition, market sales information, and feature.
If the vehicle is valued at much lower than your auto loan balance, the lender or leasing company demands the difference from you. You no longer have to worry about the resultant financial liability with gap coverage.
Gap insurance protects you from making loan payments on a car you no longer have. But is gap insurance necessary on a used car? Do you need gap insurance on a vehicle you intend to pay for quickly? On a used car, gap insurance is essential if your loan or lease period is at least 48 months.
The Right Time to Buy Gap Insurance
Before you get gap insurance, you should ensure you are the car’s original owner. That means that you hold the loan or lease on the vehicle. The right time to get gap insurance is immediately after buying a new car. You’ll likely get a loan/lease payoff when purchasing a used car.
Within the first two to three years of owning a new car, you’re more at the risk of owing more on your loan payments than the car is worth. That’s the right time to get gap insurance.
You need to consider if its market value is behind the loan or lease amount for a used car. If it is, it doesn’t matter how old the car is. Go ahead and get gap insurance.
You should have gap insurance until you have equity on your car. That means that your loan balance is no longer more than the value of your car.
Where Can You Get Gap Insurance?
To who do you go for gap insurance? Of course, the two primary gap insurance providers are the car dealership, lender, or your auto insurance provider. When should you get gap insurance from any of these sources?
1) Your Lender
You’ll likely get a gap insurance offer from your lender at the time of financing a new car. Some lenders even make part of extended warranties. However, lenders tend to have the most expensive gap insurance offers, costing nearly $200 annually.
Before buying auto insurance from a lender, check if it is a requirement in the contract. Some lenders require car buyers to have gap insurance, so you need to be sure you need it. However, remember buying collision and comprehensive insurance is a requirement.
2) Car Dealership
Car dealerships may also offer gap insurance to their customers after signing up for a car lease. In the case of car dealers, you may end up paying much more than the market rates for gap insurance. That applies to both a new and old car. Dealerships often include gap insurance in the lease agreement. So, you need to check it to be sure.
3) Auto Insurance Company
Major insurance companies provide gap insurance to their clients. Even though the prices vary, you’ll likely pay anything between $10 and $20 on top of comprehensive and collision insurance. Considering what happens when a car gets totaled or stolen, that looks like a small price to pay. Therefore, auto insurance companies are the best place to look if you want gap insurance.
4) Online Insurers
Several specialized insurers offer gap coverage to car owners via online platforms. These specialized gap insurance providers sell gap insurance upon payment of a one-time fee. An excellent example of such an insurer is Gap Direct.
How Much Does Gap Insurance Cost?
One of the most lingering questions is: How much does gap insurance cost? It depends on whether you get it from your auto insurance company, lender, or car dealership. To add gap insurance to conventional coverage, an insurance provider may require you to pay a small fee.
The Insurance Information Institute (III) puts that cost at nearly $20 annually. Factors determining that include the value of the car and the length of the loan or lease period.
You need to compare auto insurance rates from two to three companies before picking one. Whatever company you choose, insurance companies have cheap gap insurance.
If you purchase gap insurance from a lender, you can expect to pay a flat fee of between $500 and $700, observe the non-profit consumer group, United Policyholders. Compared to commercial banks, credit unions have the cheapest rates.
One thing to consider is that the lenders include the gap insurance cost in the loan repayments. Therefore, any insurance on the loan also applies to the charge for gap coverage.
The interest rate will likely be around 6%, resulting in a total of $800 for three years. Now, compare that with the $60 fee by insurance companies, and you can guess who offers a better deal.
Regardless of whether you choose a dealership, lender, or auto insurance company, the rates vary from time to time. So, be sure to check the applicable cost at any particular time.
Circumstances When Gap Insurance Is Necessary
Gap insurance is necessary when your auto loan balance is much more than the actual cash value of your car. That may arise in different situations when you take a loan or lease for a car. On average, you should consider gap insurance if you find yourself in the following conditions:
1) You Have Leased a Car
The dealership may require you to get gap coverage when leasing a car. That’s especially if the lease value of the vehicle is more than what your car is worth.
2) Small Down Payment
Dealerships and lenders often require car buyers or lessors to make a down payment. If your down payment is too small to offset the gap between the value of the vehicle and what you owe, gap insurance becomes necessary. A small down payment is anything below 20%.
3) Longer Financing Period
For how long are you financing your vehicle? If the lease or loan period is more than four years, you could end up owing much more on your car. There are high chances of you slipping into negative equity on your vehicle.
4) Protection Against Depreciation
Some vehicles, especially luxury cars, have an extremely high depreciation rate. If your car falls in that category, you need to purchase gap insurance. Compared to used cars, new cars tend to depreciate faster. Also, vehicles that clock lots of mileage within a short time will likely depreciate at a faster rate.
5) Loan Rollover
A loan rollover means increasing the repayment period to reduce the monthly payments. After rolling over your loan, you might discover that your loan balance is much more than the value of the car. In that case, you need gap insurance for protection against negative equity.
How Do Auto Insurance Companies Determine a Total Loss Vehicle?
Generally, cars get declared total loss when the repair cost is more than their actual value. The process of determining whether you have a total loss remains the same both for new and used cars.
A car can total out a car even when repairs are slightly less than the car’s value. Therefore, if repair costs are at least 75% of the value of your vehicle, the auto insurance company will likely declare it a total loss.
After determining that your vehicle is a total loss, the insurance company will contact you to explain how they arrived at a decision. The actual valuation method may vary from one insurance company to another.
For most insurance companies, the car’s actual market value is the first thing they consider. The market value refers to how much you would have fetched if you sold the car just before the accident.
Insurance companies can determine the vehicle’s fair market value with the NADA valuation system. They also consider the vehicle’s mileage and condition just before the accident.
However, car owners can refute a vehicle’s cash value as presented by the insurance company. That may require you to seek help from an arbitrator or court of law. It can be a protracted process, requiring lots of patience.
Also, the technological and safety features inside the car can play a role. The insurance company might not know or care about any of the upgrades you might have made. So, inform them about it.
Important Information About Gap Insurance and Old Cars
Gap insurance serves the purpose of helping out individuals with higher loan balances than the value of their cars. You need to ask if it’s necessary to get gap insurance on a used car. If you intend to pay cash for a used car, you have no reason to get gap insurance.
Even though gap insurance would be unnecessary in that case, you would need comprehensive coverage and collision coverage, which are necessary for repairs resulting from an auto accident.
Your car depreciates with every extra mile you drive. Therefore, regardless of the age of your used car, gap insurance is necessary if you intend to drive it a lot. Annual mileage of at least 15,000 miles is essential to get gap insurance.
Before buying a used car, check its value. If you have an attractive deal and you’re financing at most 80 percent of the vehicle, you don’t need gap insurance.
Alternatives to Gap Insurance On Used Cars
You don’t have to take gap insurance. Even if you have no equity on your vehicle, several options work much better than gap insurance. here is what you can do if you wish to avoid gap insurance:
1) Loan/Lease Payoff
Loan/leaf payoff is designed for used cars. It differs slightly from gap insurance regarding how much compensation you get. While gap insurance is available for new car owners, loan/lease payoff is suitable for new and second-hand cars. With loan/lease payoff, you, the auto insurance company, can compensate nearly 25% of the vehicle and not just the amount it lacks equity.
2) New Car Replacement Insurance
Sometimes, your need for a new car could outweigh the need to pay off an old one. In that case, you can purchase new car replacement coverage rather than gap insurance. However, further car replacement coverage costs much more than gap insurance. It is essential in replacing your old vehicle with a new one of a similar make and model, less the deductible.
3) Better Car Replacement Coverage
Getting gap insurance and new car replacement coverage is only possible if you have a new car. So, you need a better car replacement cover for a used car. With that, your loan balance gets adequate cover in case of a devastating accident.
How to Claim Gap Insurance Payoff?
Suppose you have gap insurance and the worst – your car has been in an accident – has happened. How do you ensure that the auto insurer behind the coverage pays you?
Before making a claim, you should familiarize yourself with the policy’s terms and conditions. Check for time limits in making a gap claim and learn about your excess. Major insurance companies require claimants to submit certain documents or information. Prepare everything you would need for that.
Now you must call the gap insurance provider. It is essential to talk to the insurer and discuss the settlement before accepting it. Sometimes, the insurer may initiate the process of talking to you about your gap insurance settlement.
If you have an outstanding car loan, agree with the insurer on clearing it. The auto insurance company might pay the loan balance automatically or transfer the funds to you first. Make sure you are clear on what needs to happen.
Possibly, you might be unsatisfied with the response from the insurer, resulting in a dispute. You may approach an ombudsperson or another third party to help resolve the dispute.
If that doesn’t work, contact your state’s department of insurance. In America, every state has a department that enforces the laws and regulations governing insurance.
Some gap insurance policies’ terms and conditions allow parties in a dispute to seek arbitration. Check if your does and try that option. If it doesn’t, file a sue the insurance company in court for a legal claim.
Frequently Asked Questions (FAQ)
The Bottom Line
If you’re acquiring a car with a loan or lease, gap insurance is worth considering. Whether it is a new or old car, you will likely owe more than the car is worth. You can avoid topping up your car loan with gap insurance when the car gets totaled or stolen. For a used car, you may need to take a loan/lease payoff instead of gap insurance, in the strict sense. Don’t hesitate to discuss it with your car dealership, lender, or auto insurance for available options.