Gap insurance is separate from a full-coverage insurance policy. Although you may purchase gap insurance from your car insurance provider, it pays out for your vehicle's loss differently than a full-coverage insurance policy. To determine whether you should purchase gap insurance or if it will cover your loss, consider its purpose and the terms of coverage.
Full-Coverage Insurance
Full-coverage insurance pays for repairs to your vehicle or for its market value if it is determined a loss by your insurance company, or when repairs exceed the car's market value. When you have a loan on your car, you are required to carry a full-coverage insurance policy. If you experience a total loss, your market-value payout goes to your lender without consideration of your loan balance. If the insurance payout is more than your loan balance, your lender will return the excess payment to you. If you owe more than the car's value, you are responsible for satisfying the balance still due on your loan.
Purpose of Gap Insurance
If your market value payout does not satisfy your loan, gap insurance pays your remaining loan balance so you don't have to. You usually have one opportunity to purchase the policy, which is at the time you purchase your car. Purchase the policy only if you are upside-down in your car loan, meaning you owe more to your lender or leasing bank than the vehicle's market value. You do not receive any money back from a gap insurance policy if you do not use it.
Warning
Gap insurance will pay off your loan balance as long as you abide by your contract. Read your gap insurance contract to make sure you are covered for a total loss. For example, you might find that you'll lose your gap insurance benefits if your full-coverage insurance policy lapses or cancels. If you have let your full-coverage policy expire or decreased your policy coverage, you aren't likely to obtain gap insurance coverage.
Paying Off Your Lender
If you did not abide by the terms of your gap insurance policy and it does not pay off the remaining balance of your loan, you must pay your lender yourself. As stated in your loan contract, you are responsible for the balance due on your loan, whether you have your car or not. Make arrangements with your lender to continue making car payments until your loan is satisfied. Otherwise, your non-payment is reported to the credit bureaus, which negatively affects your credit rating.
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