When a vehicle is totaled in an accident, a car insurance policy only covers its market value. If an owner has a loan on a totaled vehicle, he may end up owing money to the bank if the market value of the car is less than the loan balance. In this case, gap insurance can save him hundreds or thousands of dollars.
Gap Protection
Gap protection covers the difference between the loan balance and the insurance settlement when a vehicle is damaged in an accident and is beyond repair. Not every vehicle needs gap protection. Consumers often obtain financing without putting a large down payment on a vehicle. Vehicles depreciate by as much as 30 percent in the first two years. If a vehicle gets in an accident during that time, most likely its value will be considerably less than the loan balance. In this case, car owners may benefit from gap coverage.
Types of Gap Protection
A consumer may have a choice of gap or gap plus coverage. In the event of a total loss, gap covers the balance due on a loan or a lease after the insurance company makes a payment, less the insurance deductible. Gap plus protection offers the same as a regular gap but also cover the insurance deductible of up to $1,000. Restrictions may apply. A consumer should check the coverage information to ensure the plan covers all types of loss, including accidents, natural disasters and theft.
Refinancing a Loan
Gap coverage doesn't transfer from one loan to another and ends when a loan is paid off. When a consumer refinances, he obtains a new loan in place of an old one. When an old ends, so does gap coverage. When refinancing, he should purchase a new gap policy to replace the old one. He must pay a full charge for the new coverage. However, depending on the provider, he may receive a prorated refund for the old policy. He should check the contract for information on the refund policy.
Purchasing Gap Coverage
Lenders may offer to include the cost of gap protection in the loan when refinancing the vehicle. While this may seem like a good idea, a consumer should consider the long-term cost as he will pay interest on that amount. Lenders, car dealers, insurance agents and online vendors will offer gap policies at different prices. Cash or credit card payment is generally required at the time of purchase.
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