Written By: Erika Carroll, First New York’s Senior Real Estate Loan Expert
Many people overlook the value of getting gap insurance for their cars. While they think that their vehicle is worth more than it is, that may not be the reality. So, what can you do to protect yourself financially when you owe money on a depreciated vehicle?
My name’s Erika Carroll, and I’m First New York Federal Credit Union’s Senior Real Estate Loan Expert. With my background in the car and financial industry, my simple answer would be to invest in gap insurance and understand how it could protect you and your auto loans.
In this article, I’ll explain why it’s more important than ever in today’s automobile market to know how gap insurance works and what gap insurance covers. This way you can get the best coverage for your new car before you leave the dealership.
What is Gap Insurance?
Gap Insurance is additional insurance coverage that helps protect you from paying more in case you are involved in an accident and total your vehicle, four-wheeler, snowmobile, motorcycle, or camping trailer. It covers the difference between what your vehicle is worth (this is what your standard insurance will pay) and the amount you owe on your loan.
In other words, gap insurance is additional coverage that protects you in case your loan-to-value ratio in an auto loan exceeds the market value of your vehicle itself.
How does Gap Insurance work?
If you just bought a brand-new car, your lender may offer you gap insurance.
At this point, you may be thinking, “Gap insurance? I just bought a new car and I have car insurance, why do I need gap insurance if I have full coverage?”
However, the truth is that as soon as you take possession of your new car, its value starts depreciating. This is called car depreciation. If you traded in a vehicle and had negative equity, that puts you in an even worse position.
With the current supply and demand of used cars, you could be paying more than what you would have a couple of years ago, so the loan-to-value might be higher than normal. These are all situations where paying a small one-time fee for gap insurance could save you from a financial loss. You might need gap insurance if:
- Made a small down payment (20% or less)
- Financed for 60 months or longer
- Leased the car
- The vehicle’s purchase value depreciates faster than average
- Carried over negative equity from an old car loan into your new car loan
If you fall into one of these categories, you may want gap insurance coverage. We’ll go over this more in the next section.
How Does it Protect You?
If you live in New York State, you’re required to have car insurance. Though it might cover you in case of an accident, no one really discusses how it only covers you to an extent.
With any of the scenarios I mentioned above, you could potentially face a financial loss if you traded in a vehicle with negative equity or if your loan-to-value is higher than normal. So, what does gap insurance cover?
What does it cover?
Don’t find yourself in a situation where you are left with a vehicle that is totaled and a balance left on your loan, especially if your insurance company gives you less than what you owe. Instead, use gap insurance’s separate protection to cover the rest of the balance on your loan.
So, you only have to worry about your insurance deductible — phew, way less stressful than having to worry about how you’re going to pay that loan off AND find another vehicle.
Is Gap Insurance Worth It?
At this point, you’ve learned a lot of important things about gap insurance, and you may be wondering, “Is gap insurance worth it?”
Remember, if you fit into one of these bullets below, it’s in your best interest to see what gap insurance can do for you:
- Made a small down payment (20% or less)
- Financed loan payments for 60 months or longer
- Have a loan or lease on the car
- The vehicle’s purchase value depreciates faster than average
- Carried over negative equity from an old car loan into your new car loan
You’ll want to think about these factors. Because if your car(or any of the other types of vehicles mentioned above) is totaled, you don’t want to put yourself in a situation where you have to pay your loan off and purchase another vehicle. Instead, gap insurance would cover your auto loans, so you only have to pay your insurance’s deductible.
So, do you need gap insurance if you have full insurance coverage? The short answer is: These are two separate forms of protection for your auto. Do your research and get educated on how gap insurance could protect you and your auto loans in case of a total loss. For another layer of protection, I also suggest looking into extended warranties to protect yourself from costly repairs.
But, if you’re asking about the value of gap insurance, I’d say it’s something that has always had immeasurable value in most cases I’ve seen.
Need To Talk to Someone? Contact Me Today!
Gap insurance can be confusing, and it may be even more puzzling when you start thinking about whether your loan exceeds the market value of your car. Of course, there are certain instances where you might be in an equitable position and don’t need gap insurance, but sometimes it can’t hurt to reach out to an expert on the topic.
That’s why you can always talk to me or any of First New York’s local loan experts! We’re more than happy to review your specific options and help you decide what’s right for you.
You can contact me directly at (518) 393-1326 ext. 1033. You can also call (518) 393-1326 and press 3 to talk to any First New York local Loan Expert or visit us online! If you want to continue your auto financial education, visit our Learning Center for more auto content.