Gap insurance covers the difference between what you owe on the vehicle and what the vehicle is worth. It comes in to play if the vehicle is stolen or totalled (damaged to the point that fix would cost a lot more than the vehicle is worth) while the owner is still making payments.
Let us say you purchase a fresh vehicle for $20,000. 6 months after purchasing your auto, it’s involved in an accident and totalled.
Your collision insurance company determines your sixmonth-old automobile is now worth only $16,500. They’ll pay that sum to you (less your collision deductible if the injury is your fault). 100 would come from the pocket, if you didn’t have gap insurance, the additional $ 1. (Note however, that if your insurance provider determines your deductible applies, that money will come from the pocket — gap insurance will not cover it.)
Within the event of a lease, even though you’re not purchasing the vehicle outright, you’re accountable for the price of the vehicle if it’s stolen or totalled. Because lease payments — and therefore the total amount of cash you’ve tied up in the car — is significantly lower, the huge difference between what you’ve paid and the importance of the car could be enormous — therefore gap insurance is considerably more crucial for a lease. Actually, it is required by many lease contracts.
For purchasers, gap insurance just makes sense should you expect to be “upside down” to the car (you owe more than it’s worth). If you made a low down-payment, in case you purchased a car that depreciates quickly, in case there is a higher rate of interest or in case you rolled over other prices, like money owed on a trade-in, into your newcar payments, gap insurance is logical. Most buyers, especially those who made a strong down payment, will always be rightside-up to the auto, and consequently do not want gap insurance.
Who should purchase gap insurance:
People that are leasing an automobile or who expect to owe more than the car is worth for a considerable period of time.
Who should not purchase gap insurance:
Purchasers who’ve organized their down and monthly payments in order to make certain they will not be “upside down” to the automobile for any significant time period.