For many people in the U.S., buying a car isn’t possible without a car loan. That’s because cars can cost tens of thousands of dollars and saving up enough to pay cash could take years.
For drivers with a car loan, it is especially important to make sure they have the right auto insurance. One of the key types of car insurance coverage that may be necessary is called gap insurance. Many lenders require motorists to maintain gap coverage, but even when this type of insurance isn’t required, buying it could be a good idea anyway.
Gap insurance could protect against huge problems in the event of a total loss
When drivers insure their vehicles, an auto insurance company typically pays for the repairs of the car when something goes wrong. But there are circumstances where a car cannot be repaired because it’s too badly damaged or because the cost of repairs would exceed the amount that the vehicle is worth. In other cases, cars are stolen, which means an insurer would pay out for the vehicle if it’s not recovered.
When insurance companies pay compensation for a stolen vehicle or for a car that has been declared a total loss, the insurer assesses the fair market value of the car. And that’s the amount the policyholder receives. The problem is, this fair market value is usually, if not always, less than the amount the policyholder paid for the car. That’s because cars tend to decline in value over time — especially if they are new models when purchased.
If a driver is compensated for only the fair market value of a vehicle, that amount may be far below what the motorist owes on their auto loan. For example, a driver might get only $10,000 in compensation for a car that has been declared a total loss but could still have an outstanding loan balance of $15,000.
This problem is especially common when motorists borrow a lot to buy new cars, make low down payments for their vehicles, or stretch out their loan repayment time for a long time.
Unfortunately, if a driver is paid less by an insurer than the amount of their car loan, the lender still expects to be paid the full loan balance. This could leave the driver without a car and with an insurance check that’s not enough to repay the whole loan. In this case, the motorist could be held personally responsible for paying off the balance on a loan for a car they no longer own.
That’s where gap insurance comes in. It repays that balance so the driver doesn’t end up having to cover it out of pocket. It could prevent serious financial damage to the driver, and it also ensures the lender is protected — which is why most mortgage loan providers require it.
If you took out loans to pay for a vehicle, be sure to check and make sure that gap insurance is included as part of an existing car insurance policy. If it isn’t, consider contacting an insurance agent or signing into online accounts to add this coverage and get the essential protection it offers.
View more information: https://www.fool.com/the-ascent/insurance/auto/articles/have-an-auto-loan-you-probably-need-gap-insurance/