Gap protection is often overlooked by consumers when they are financing a new or used vehicle. It can save a car owner a lot of money if a vehicle is in an accident and declared a total loss. Gap protection covers the difference that may exist between a car insurance payout and the loan balance.
What Is Gap Insurance?
An auto accident may leave your vehicle damaged beyond repair. Your auto insurance will determine and pay a fair market value of the vehicle. This amount is determined by the car market trends, the condition and mileage of the vehicle at the time of the accident. Based on this information, the insurance payout may be more or less than the car loan balance. If it's more, you will receive the excess. If it's less, you have to cover the difference out-of-pocket, unless you have gap insurance that will pay off the remaining balance after the insurance payout.
Applying Gap Insurance to a Loan
When a car is damaged in accident, you need to notify the bank that holds the loan and ask for the loan balance. Your insurance agent will need to know this information, as well as the loan number and the bank's mailing address to mail the pay-off check. You will need to wait until your car insurance pays to determine how much the remaining balance is before contacting the gap protection company. The gap protection company will collect the information regarding the accident and the loan details. It will cut a check for the difference and send it directly to your bank to pay off the loan balance.
Types of GAP Insurance
A regular gap coverage simply pays off the loan balance and you walk away owing nothing. If you have a Gap Plus coverage, it does that and also gives you $1,000 towards a new car loan. When you purchase a new or used vehicle and set up financing, the gap protection company will send a check for $1,000 to the bank, which will apply it to the loan balance. The gap coverage check will not reduce your loan payments, but it will lower the total amount that you owe.
Purchasing Gap Insurance
You can purchase gap coverage through a dealer, an insurance agent or the lender who is setting up your auto loan. Dealers generally have higher fees for gap insurance as they add their commission to it. Insurance agents and lenders may offer better prices. When purchasing gap coverage, you can pay for it with cash, a check, an account transfer or a credit card. A lender may finance it with the loan, which will increase the loan amount and your monthly payment. You will also end up paying more for your policy in the end, as interest will accrue on the loan balance.
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