Gap insurance for cars cost
A new car might be the worst investment in the world. Why? A new car loses 15% to 20% of its value the minute you drive it off the dealership lot! But this phenomenon is not limited to new cars – used cars also quickly lose their value.
If you are financing your car, it is unlikely that your car’s value will be equal to or greater than the amount of financing over the life of the loan. The bottom line is that most people owe far more than their car – new or used – is worth (i.e. upside down car loan), and that can have extremely expensive repercussions in the event of an auto wreck. Gap insurance might be the solution to avoid such a disaster.
What Is Gap Insurance?
Gap insurance covers the “gap” between what your insurance company will pay out and the amount of money you owe on your car loan in the event of a total loss. When you buy a car, the retail price that you pay is greater than the vehicle’s resale value. On top of that, if you financed your car, you likely bundled additional costs into your loan that you cannot recoup, including sales taxes, title fees, emission fees, and registration.
Depending on how much of a down payment you put on your car, you may immediately be upside down on your car loan the moment you drive off the lot. That position can then be greatly exacerbated should your car get totaled, in which case you will get less money from your insurance company than you still owe on your car loan.
Say you buy a vehicle for $27,000 with $2,000 down. Shortly after purchase, it might only be worth $18,000 to $19,000 by insurance company calculations, based on factors including the car’s condition, price surveys, and industry guides such as Kelley Blue Book.
Therefore, if you destroy your vehicle and get the maximum insurance payout via collision coverage, you might still end up with a $7,000 loan balance and no car!
Do You Need Gap Insurance?
Of course, not everyone needs gap insurance. But there are some key instances where gap insurance can play a crucial role in your financial well-being:
- If you finance a car with a high rate of depreciation, you can benefit from purchasing gap insurance. Most vehicles swiftly depreciate, but some cars depreciate very rapidly.
- If you have financed your vehicle for more than 4 years, gap insurance may offer you some additional protection in the event of a total loss. A shorter financing period improves your loan-to-value ratio. In other words, the “gap” between what you owe on your car and what it’s worth will narrow and disappear much sooner with a short-term loan than it would with a longer term loan.
- If your down payment was less than 20%, you may owe more than your car is worth. If your car is totaled or stolen, gap insurance can help you pay off the balance of the loan.
- If you rolled a loan balance from another car into the loan, gap insurance can prove beneficial in the event of a total loss.
- You may be required to purchase gap insurance if you are leasing a vehicle.
- If you drive more than the average 15,000 miles annually, you can benefit from purchasing gap insurance. Cars with high mileage depreciate more quickly than other cars.
- If you are a single car family, you probably cannot afford to be without a car for any period of time. Gap insurance coverage helps indemnify your family in case of a total loss.
Essentially, you do not need gap insurance if you are certain that your loan-to-value amount will not leave you with an upside down car loan in the event of a total loss.
How Much Does Gap Insurance Cost?
The typical gap insurance rate is roughly 5% of the portion of your annual insurance premium related to comprehensive and collision coverage. These rates can vary a great deal based on car value, location, and driver history.
For example, if you pay a $600 annual premium toward comprehensive and collision insurance, your gap insurance will likely be around $30 a year.
How to Get Gap Insurance
Purchase from an Agency, Not a Dealership
You can purchase gap insurance from the car dealership, your finance company, or an independent insurance agent. However, it is usually best to avoid buying this insurance from the dealership where you purchased your car. The gap insurance rates quoted at dealerships can be up to 4 times the amount of the typical rates.
Request a gap insurance quote from your insurance agent or an independent insurance company instead. You will want to buy gap insurance right after securing a car loan. However, delaying the purchase until you can drive to your insurance agent’s office might save you hundreds of dollars.
Be Sure to Get a Refund
Gap insurance coverage only applies to the length of your loan. Once you pay off your loan, you no longer need this particular coverage.
Furthermore, the premium for gap insurance is usually paid up front or financed into the loan. For example, if your gap insurance premium is $10 a month and you financed your vehicle loan over 72 months, then you may have to pay the entire $720 at the time of purchase or roll it into the loan balance.
But remember, if you sell or refinance the car before the term of your loan has expired, you should receive a refund. Even though you paid your gap insurance premium up front, the amount is still prorated over the life of the loan.
If your policy was set at $720 over 72 months and you decide to pay off, sell, or refinance the car three years later, you should receive a $360 refund from your insurance provider. This refund should be automatically disbursed as soon as the insurance provider is notified of the sale or refinance. However, in some instances, dealerships take their time issuing the refund or will not do it without a reminder from the customer.
If you refinance your vehicle, remember to buy gap insurance for your new policy to make sure you still have coverage for your car.
When Not to Purchase Gap Insurance
While gap insurance can play an important role for many car owners, there are still plenty of situations where acquiring this insurance will likely be a waste of money.
Here are the most common scenarios when you can forgo gap insurance:
- If your car is worth far more than the loan and you know that your insurance company’s total loss payout will exceed the amount of the loan, you don’t need to buy gap insurance.
- If, in the event of a total loss, you have the ability to continue to make loan payments or pay off the loan, you don’t need gap insurance.
- If, in the event of a total loss, you will not need to replace your vehicle, you do not need gap insurance.
- If your loan is for a relatively short period of time – for example, 6 to 12 months – you don’t need to buy gap insurance.
Car ownership can be expensive. After seeing their principal and interest payment, many people resist the idea of paying another $15 a month in addition to their regular comprehensive and collision coverage.
Yet in most instances, gap insurance is a “must have” expense if you buy a car on credit. If you don’t have it, you run the risk of paying off a pricey car loan for a vehicle that you can’t drive.
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What is gap insurance?
Gap insurance covers the difference (the gap) between what your vehicle is worth and how much you owe on the car. Gap insurance comes into play if your car is stolen or totaled (damaged to the point that repair would cost more than the car is worth) before the car is paid off.
How gap insurance works
Let's say you buy a new car for $20,000. You put $500 down and your payments are $350 per month.
Six months after buying your car, it is involved in an accident and totaled.
The insurance company determines that your six-month-old car is now worth only $15,000. They will pay you that amount (less your collision deductible if the accident is your fault). You've made six monthly payments plus your down payment, for a total of $2,600; you still owe $17,400 on the car. In a case like this, gap insurance would pay the $900 difference between what collision insurance covers ($15,000) and what you owe on the car ($17,400). If you did not have gap insurance, the extra $2,400 would come out of your pocket. (Note however, that if your insurance company determines that your deductible applies, paying the deductible is your responsibility -- gap insurance won't cover it.)
Gap insurance and leasing
In the case of a lease, even though you aren't buying the car outright, you are responsible for the cost of the car if it is stolen or totaled.
Because lease payments tend to be significantly lower than purchase payments the difference between what you have paid and the value of the car can be a substantial amount of money. Therefore gap insurance is much more critical for a lease. In fact, many lease contracts require gap insurance.
Gap insurance and financed purchases
For buyers, gap insurance only makes sense if you expect to be "upside down" on the car (a situation in which you owe more than it is worth).
If you made a low down payment, if you bought a car that depreciates rapidly, if you have a high interest rate or if you rolled over other costs into your new car payments (such as money you still owed on car you traded in), gap insurance makes sense. Most buyers, particularly those who made a healthy down payment, will always be right-side-up on the car, and therefore don't need gap insurance.
Who should buy gap insurance:
People who are leasing a car or who expect to owe more than the car is worth for a significant amount of time should definitely buy gap insurance.
Who should not buy gap insurance:
Buyers who have arranged their down and monthly payments so as to ensure that they won't be "upside down" on the car for any significant period of time probably do not need gap insurance.
Who are Easy Gap?
Easy Gap is one of the leading names in the independent Gap Insurance market in the UK. Established by Aequitas Automotive Ltd in 2010, the Easy Gap brand is one of a number of niche insurance facilities operated by the company. Easy Gap sits alongside its sister brands GapInsurance123.co.uk, Shortfall.co.uk and Totallossgap.co.uk. Between these facilities, we can offer a range of Gap Insurance products offered by different insurers, as well as a range of complimentary products such as Tyre Insurance and Alloy Wheel Insurance.
All four Aequitas Automotive Ltd Gap Insurance brands are featured on the Which? Gap Insurance report online. Both Easy Gap and GapInsurance123 feature on the MoneySaving Expert Gap Insurance report also.
The huge advantage in having a range of options is that we can, with impartiality and authority, compare and contrast products and features from different insurers. We think this ability allows you a clear advantage over brokers who only have one insurers terms to offer you.
Having access to a number of insurers products, via our sister brands, also allows Easy Gap customers access to a range of complementary products such as
Alloy Wheel Insurance inc cover for diamond and laser cut
Complete Wheel Insurance
Scratch and Dent Insurance
Motor Excess Insurance
Where is Easy Gap based?
Aequitas Automotive Ltd, trading as EasyGap.co.uk, is based in the historic Hamilton Square in Birkenhead on the banks of the River Mersey. Hamilton Square contains the highest number of Grade 1 listed buildings in the UK, outside Trafalgar Square in London.
Aequitas Automotive Ltd purchased 56 Hamilton Square in the middle of 2015, and after nearly a year to renovate, moved into the 3500 sq ft building in April 2016.
In July 2016 Aequitas Automotive Ltd completed the purchase of the adjacent 57 Hamilton Square with plans for the new building to accommodate further expansion plans of the company.