If you’re shopping for car insurance on a new car, you may wonder if your coverages will pay off your car loan if it’s totaled. Chances are they won’t unless you get a special kind of coverage.
Car insurance policies typically provide coverage for liability, collision (damage to your vehicle from an accident), comprehensive (damage from fire, theft, vandalism, etc.), and uninsured/underinsured motorists.
With these coverages, damage to your vehicle is usually only covered up to the current market value of your car. So if you bought a brand new car for $25,000 and three months later it’s totaled, you may only be reimbursed for the current market value — which would be quite a bit less due to the rapid depreciation of new cars. For example, if the current market value for your car was now only $17,500 (hypothetically) that’s the most you would be reimbursed for.
Of course the problem arises if you still owe more than market value on your car loan. Then you would still need to pay off that difference to the lien holder. GAP insurance was created to help consumers in this situation. It is a special coverage you can get when you purchase your car that will cover the “gap” between what you owe and what your car’s value is. It may or may not cover any deductible you have with your regular coverages.
Of course GAP coverage will cost you extra above your minimum required coverages for auto insurance. You need to decide if it’s worth it based on your situation and the type of loan you have on your vehicle. You can ask for a quote on GAP coverage when you’re shopping for car insurance.
Not all insurance companies may offer it, so you definitely want to get several car insurance quotes. This is also the best way to save money since car insurance rates vary from company to company. A convenient way to do this is to get your quotes through one Web site that offers comparison quotes. It can save you time because you should only have to enter your information once.