When you buy a new or used vehicle, auto insurance coverage is often a legal requirement. however, if you lease or finance your car, you should also consider adding gap insurance coverage to your policy.
Difference insurance will help you pay off your loan if something happens to your car. You can purchase gap insurance from most major insurance providers and some car dealers. If you’re considering differential insurance for your financed or leased car, keep reading. We’ll explain everything you need to know so you can answer the most important question: is gap insurance worth it?
what is differential insurance?
There are several types of auto insurance. gap covers the difference between your auto loan balance and the car’s cash value in the event of a total loss.
It’s not uncommon for consumers to buy cars with little or no down payment and then walk away in a vehicle worth less than their loan balance. however, if your car is totaled, your comprehensive or collision insurance reimbursement is based on the cash value of the vehicle, not your loan balance. You could end up with no car, no way to buy another car, and a balance due to your auto lender. gap insurance is designed to collect that balance.
gap means guaranteed asset protection; It activates when your car is stolen and not recovered, or is destroyed in an accident. you will need to have full coverage on your policy to have gap insurance.
cost of differential insurance
The cost of gap insurance depends on a few factors, including the make and model of your vehicle, and where you purchase the policy. According to a 2022 analysis by insurance.com, the average cost of gap insurance is $2,080 a year, which breaks down to around $173 a month. however, not all gap policies are the same. some have extras, like collateral that goes into your car loan, which costs more.
Although it may be the most convenient option, purchasing gap insurance from your dealer is probably the most expensive way to obtain it.
attorney steve lehto of lehtoslaw.com says one problem is that the dealer gets a cut of the price of the policy.
“i.e. the insurer just says, ‘as long as we get $300 for this, you can go as high as you want.’ so the policy could be $399 ($99 profit) or $999 ($699 profit). these things they’re negotiable. anyone who pays the asking price for the gap at a dealer is a jerk. at the very least, call your own agent and get a competitive offer,” says lehto.
However, there may be an advantage to purchasing differential insurance through a dealer.
tip”sometimes the dealer’s coverage will pay off a portion of the loan, which was reinstated from a previous loan,” lehto says. “whereas a typical insurer’s gap coverage only covers the loan payment attributable to the purchase price of the car.”
difference insurance versus lease/loan and replacement insurance
In addition to gap insurance, there are other types of insurance products (lease/loan coverage and new car replacement insurance) that can protect you financially if your car is totaled.
comparison of gap with lease/loan coverage
Both differential insurance and loan/lease insurance help cover the difference between the cash value of your vehicle and the amount you still owe on your loan or lease, in the event of a total loss. The main difference between the two types of insurance is that lease/loan coverage generally places a limit on the benefit available, usually as a percentage of the value of your vehicle.
According to the esurance insurance company, lease/loan insurance often pays about 25% of the actual cash value of your vehicle. Depending on where you are in the process of paying off your loan and how it compares to the cash value of your vehicle, this may or may not be enough to cover the remaining loan or lease value in the event of a total loss. /p>
For example, if your car is worth $25,000 and your lease/loan coverage pays up to 25% of your vehicle’s value, the maximum total loss payment would be $6,250. During the first part of your loan, this coverage amount may not provide complete protection.
comparing the gap to new car replacement insurance
Gap insurance coverage is designed to protect you if your car is a total loss by making up the difference between the car loan balance and the car’s cash value.
New car replacement coverage is different. covers the difference between the cash value of the car and the cost of buying that same car new. When you pull a new car off the lot, it officially becomes a “used” car and immediately loses value. If you lose your new car while hitting a rock on your way home from the dealership, the cash value of the car would be less than the cost to replace it. replacement coverage would make up the difference, allowing you to purchase another car exactly the same as the total.
however, this has nothing to do with the amount of your loan. If your loan balance exceeds the car’s replacement value, you’ll still have to pay your lender unless you have gap insurance. The illustration below shows what happens when you total your car with gap insurance.
If the cost to replace your car is more than your loan balance, it may be better to have new car replacement coverage. The illustration below differs from the one above in that the replacement cost is higher than the loan balance.
The comparison between the gap and the replacement of a new car depends on the balance of the loan and the depreciation rate of the car. If your loan amount exceeds the purchase price of the car, gap insurance should pay more. if the loan is less than the car’s replacement price, the new car replacement may pay more.
how does gap insurance work?
gap works when your car is declared a total loss, either due to an accident or theft of your vehicle.
This illustrates where the gap in your insurance protections fits:
- Your insured car may have a cash value of $5,000
- Suppose the amount owed on your car loan is $6,000.
- an accident makes your car a total loss.
- After your deductible, your comprehensive or collision insurance should cover the cash value of your vehicle, or $5,000.
- Your gap coverage would provide the $1,000 needed to pay off your auto loan.
Note: Gap insurance does not apply a deductible and some gap policies provide reimbursement of your comprehensive or collision deductible.
what does gap insurance cover?
what does gap insurance cover? gap insurance covers damage to your vehicle due to a catastrophic event such as fire, theft or flood. If you lease and your car is totaled while it is still being leased, gap insurance will pay whatever is left of the lease balance.
It’s an inexpensive addition to your auto insurance that could make a big difference if totaled. gap insurance pays only if you have comprehensive and collision insurance. With gap insurance, you can choose to have the company pay your deductible.
what does gap insurance not cover?
Difference insurance does not compensate for late payments or late fees if you lose your job, need a rental car, or if your car is repossessed.
A summary of items not typically covered by gap insurance include:
- Items purchased with the auto loan, such as extended warranties or credit life insurance.
- the unused balance of an extended warranty.
- any balance from previous loans.
- lease or loan security deposits.
- any equipment you have added to your car beyond what is factory installed.
- payments due on loans or leases.
- excessive mileage lease fines.
- deductions made by your primary insurer for previous damage, towing, storage and/or wear and tear.
- any other loss that is excluded from your auto insurance policy.
- Most cars start to lose value the moment the ink dries, going from “new” to “used”.
- car buyers are allowed to buy cars with smaller down payments, or even no down payments.
- some manufacturers allow buyers to forego payments for an initial period while the car depreciates.
- dealers can accept trade-ins that are “upside down” and add the deficiency to the new car loan.
- Buyers can include purchase costs, such as transfer fees or extended warranties, in their loans.
- Auto loans today are available with much longer terms, averaging about six years. it can take years to pay off the balance below the car’s cash value. the average length of auto loans is now 69.5 months, according to edmunds.com.
- prices are rising: the average price paid for a new car is close to $40,000.
- Your vehicle is rented.
- Your down payment is less than 20% of the value of the car.
- Your trade-in was upside down (ie you had a loan balance greater than the value of the vehicle).
- you drive more than most people, which makes the car lose value faster.*
- your auto loan term exceeds 48 months.
- You have purchased a model that is rapidly depreciating.
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- Resist longer-term loans. Car dealers love it when you talk about payment instead of price, but that makes it easier to forget how much you’re really spending . If you can’t afford the payment with a 48-month loan, negotiate a lower price or choose a cheaper car.
- Avoid excessive depreciation. Some cars hold their value much more effectively than others. You can compare resale values on sites like Kelley Blue Book or the National Automobile Dealers Association (nothing).
- Make a down payment of at least 20%, even if you qualify to finance more. can avoid the need for a gap and also secure a lower payment.
- do not include other fees on your auto loan. If you finance taxes, licenses and registrations, you accumulate a large amount of financing that is not related to the value of the car. If you include purchase costs or dealer packages like service plans and extended warranties, make sure your gap insurance covers them, because some won’t.
- if you have leased or financed a car and the loan is not paid in full
- if the term of your loan is greater than 48 months
- you drive a lot
Also, it’s important to note that gap insurance is not retroactive. you can’t buy it after an accident and file a claim for that accident.
tip”as with all types of auto insurance, a differential insurance policy must be purchased before the damage occurs in order for the claim to be covered,” says jaime arias, a licensed auto insurance agent with dynamic insurance solutions. “You cannot buy gap insurance retroactively to cover your loan balance after your car is destroyed in an accident.”
When purchasing gap insurance, make sure you know exactly what is covered and what is not covered. not all policies are the same.
When do I need differential insurance?
Ultimately, gap coverage is helpful when you’re “upside down” on your loan, meaning your loan balance exceeds the value of your vehicle.
what happens for these reasons:
These trends increase the chance that your car will lose value faster than you can pay off the loan balance. that can leave you in a financially risky position.
who should buy gap insurance?
If you bought or leased a new car, you should consider purchasing differential insurance, especially if you have a low down payment or a long-term loan.
When deciding how much coverage you need, think “worst case.” If he wrecks his new car on the way home from the dealership, how much will he owe? What is the cash value of your car?
You probably don’t need gap insurance if you could write a check for the difference without even checking your balance. But if any of these statements are true, consider purchasing gap insurance coverage:
*According to the Department of Transportation, the average driver logs 13,476 miles in their car each year. men drive more than women, averaging 16,550 miles a year, compared to 10,142 miles for women. If you rack up more miles a year than the average driver, chances are your car will depreciate faster than it otherwise would.
how to get differential insurance
You can’t buy gap coverage unless you also have comprehensive and collision insurance. gap insurance picks up where it left off.
You generally have 12 months after purchasing a vehicle to add differential insurance to your policy. If you’re buying a new car and expect to be “upside down” from a cash value to loan value perspective as soon as you drive off the lot, you should consider purchasing gap insurance as soon as possible.
You may be able to get the additional coverage from your current auto insurer, your dealer, or another company. Below is a partial list of gap insurance companies:
where to buy differential insurance:
how to save on differential insurance
Over time, your auto loan balance should decrease. how quickly this happens depends on your loan amount, interest rate, and term.
For example, the chart below shows the amortization of a 60-month auto loan of $35,000 at 7% interest with a payment of $693.04. the blue line shows the depreciation of the car at a “typical” rate as reported by consumers, while the orange line indicates the declining balance of the loan.
Notice that during the second year, the typical car’s depreciation rate leveled off somewhat and the car loan balance fell below the value of the car. This illustrates why you shouldn’t just “set and forget” your car insurance when you buy your car.
Structuring your purchase to eliminate the need for gaps reduces financing and insurance costs. Keep these tips in mind when shopping for a car:
is gap insurance worth it?
You may be thinking, is differential insurance a good investment? gap insurance is worth it:
The decision whether or not to purchase differential insurance should be made prior to taking possession of any vehicle; Otherwise, there may be financial repercussions for paying monthly premiums that could have been avoided by purchasing gap protection in advance.
Gap insurance is an inexpensive way to protect yourself from the risk of an expensive car repair or replacement bill if your vehicle is totaled or stolen.
can you get differential insurance for a used car?
Used car loan terms are typically shorter than new car loans. Down payment requirements are often higher, so you may not be upside down when you hit the lot.
However, you need to apply the same decision-making logic to your new car, because if it’s upside down and you can’t just pull out your checkbook and pay it, an accident could ruin not only your car but your finances as well.
frequently asked questions: differential insurance
-with additional reporting by gina pogol