Gap Insurance Guide
Most people have been offered GAP insurance at least once. GAP insurance will indeed protect your car BUT not everyone actually needs to have it. Therefore, you first have to be aware of what it is and who needs it so that you will not end up wasting time and money on something you do not even need. Then, if it was indeed clear that you need GAP insurance, you must know where and how to purchase it.
For those that are unfamiliar with Gap insurance our guide provides you with all you need to know about gap insurance and the different types of gap products.
What is Gap Insurance?
The term gap insurance refers collectivley to the range of gap insurance products available on the market. There are in fact three key types of gap insurance product. The most common is back to invoice gap cover. The second and third types of product are back to value gap insurance and finance gap insurance. Each product provides a slightly different type of cover and are considered in detail below.
Back to Invoice Gap Insurance
Back to invoice gap Insurance protects against the potential shortfall in the event of an insurance claim and covers you up to the amount that was paid for the car.
Back to Value Gap Insurance
Back to value gap insurance covers you up to the value of the car on the day that the cover is taken out. The value of the vehicle is taken by reference to the current value guides.
Why Does A Gap Take Place?
Car insurance holders are put at risk when they have negative equity, that is, their car is worth less that what they owe on a loan for it, because the insurance does not cover for more replacement or repair costs than the car is worth.
Here are some of the factors that usually lead to a gap in the insurance:
- The rate of depreciation. All cars lose value. However, some cars depreciate more quickly than the others.
- Borrowing over the purchase price. Those who pay for the license, tax, registration and other extra expenses such as extended warranty and more service plans will find themselves owing more than what their car is worth.
- Getting a loan with an extended term. A loan that has a longer term equally implies lower payments and slower buildup of equity in the car.
- Putting in low or zero money down. Remember that the moment a car is used, it depreciates. Therefore, financing all or just about the car’s entire price will render you upside down as soon as you drive it home.
Do I Need GAP Insurance?
The first thing you must do is identify your car’s rate of depreciation. There are some websites that will tell you how much the worth of last year’s model is today. Once you have determined the depreciation of your car, use a car loan calculator to compute for the rate at which you will build equity in your automobile. Many of these calculators are available online. You just need to provide information about your loan and an amortization table will be displayed to you afterwards showing your outstanding balance at any instance during the term of your loan.
