What Is Gap Insurance and How Does It Work? Basically, you buy the “gap in value” when you finance or lease a car.
No, this isn’t insurance for an unfortunate buying spree at that clothing store in the mall. Basically, a gap insurance policy prevents you from being upside-down if you have a significant mishap or burglary.
If your car is taken, or totaled out due to a crash or natural catastrophe, the cash you obtain from an insurance firm normally just equals your car’s “book-value” at the time the occurrence takes place. If you have a brand-new car or truck, this might leave you responsible for thousands, because what you owe on the automobile isn’t equivalent to its value in cash.
So, is there a solution? Yes, it’s called gap insurance. And, it will make up what’s leftover between the amount you owe and the book value. It saves you from making payments on a car that you can’t drive or was stolen. Sound good so far? Well, it gets better: it’s called loan lease insurance. It’s cheaper and better coverage if you finance or lease a car or truck.
Loan Lease Insurance vs Gap Insurance
Loan lease insurance basically gives you coverage above what the vehicle is actually worth. So, it’s kinda like gap insurance, but there are some main differences to understand.
Gap insurance is usually sold by car dealers as a separate coverage. According to Texas law, dealerships can charge up to 5% of the car’s purchase price for the coverage in gap insurance. So, on a $35,000 car; you may end up paying $1,750 for gap insurance. At the same time, loan lease insurance on that exact vehicle with your car insurance company can be applied at purchase. Sometimes the addition can be made later for less money. Keep in mind, though, some carriers don’t offer loan lease policies.
In contrast to gap policies, loan lease insurance is usually limited to paying 25% more than the real cash value of the car. One scenario, if the car has a real cash value of $10,000, then the loan lease payoff can cover up to an additional $2,500. That coverage of 25 percent may not sound like a lot, but lots of times, it totally covers the leftover owed on a car and your monthly premium is a lot lower than what you could pay for gap insurance through the finance department at the dealership.
There’s another advantage. You don’t have to file two claims on the loan lease insurance. That’s what you would have to do with gap insurance. If you have an accident with gap insurance, you’re required to file once with the gap policy and then again with the regular automobile policy. Do you want to spend even more time on paperwork?
Flexibility is lacking with most gap policies. Usually, gap insurance has to be bought within 30 days of buying the new car. And, you’re only allowed to do this on a car that’s considered “new” to you. These restrictions tend to cause the buyer a challenge. Also, the gap insurance cost over the life of your loan is included at the loan’s interest rate.
Do you still have time?
Loan lease coverage can be bought at any time you need it on a truck, car, or SUV. So, you’ve got some time and freedom before deciding if coverage is necessary for your situation. Also, if you secure the gap insurance, you have approximately 30 days to cancel and get a complete refund. On the loan lease insurance, by the time you get enough equity in your vehicle, you can get rid of that endorsement and your regular car insurance policy provides coverage.
According to the Texas Finance Code, you don’t necessarily need gap or loan lease coverage to lease or loan a vehicle. But, it’s a good idea if you want to avoid owing more than your car is worth if your vehicle is totaled.
In the end, it’s good to know you have options. Talk with a local, licensed insurance agent right away so you’ll know if loan lease coverage is suitable. If you currently owe more than your vehicle is worth or lately leased a new car and your insurance carrier offers loan lease coverage, you may not be too late. You could still add it to protect your future finances from disaster.