Consumers often dismiss gap insurance as an unnecessary expense when buying and financing a vehicle. If a buyer doesn't put any money down, he may benefit from gap insurance if his vehicle gets totaled in an accident. A lender can issue a gap insurance policy when setting up or refinancing a car loan.
What is Gap Insurance?
An accident can leave a vehicle damaged beyond repair. When an insurance company declares it a total loss, it calculates the fair market value and pays that amount on the loan. The vehicle's fair market value may be more or less than the loan balance. If it is less, the borrower will owe the difference to the bank. This difference is very likely to happen if a consumer buys a new car and an accident occurs within the first two years. New vehicles tend to depreciate as much as 25 percent within the first two years. Gap insurance covers the difference between the insurance payout and the loan balance.
Refinancing a Loan
A lender issues a gap insurance policy for a particular vehicle in connection to an auto loan. Gap coverage ends when a consumer pays off the loan or refinances it. You can buy a new gap policy when you refinance. You will need to pay a full fee at that time but you may receive a prorated refund for the insurance company for the previous policy. Some insurance companies may not issue a refund after 60 or 90 days after the contract date. Your lender will issue a new gap insurance contract and mail a copy to you.
Other Options
You can buy gap insurance through your lender or check other insurance companies for better rates. Ask your auto insurance agent if he sells gap insurance. Some companies may offer a Gap Plus coverage, which offers $1,000 toward a new car loan in addition to regular coverage. A one-time fee for the regular gap insurance starts at about $100, while Gap Plus policies may cost from $200 to several hundred dollars. Dealerships generally charge much higher fees for gap insurance than lenders or insurance companies.
Paying for Gap Insurance
You can pay for gap insurance with cash, check, a credit card or a bank account transfer in some cases. A lender may include the fee in your car loan monthly payments when you refinance. This may not be the best option as you will end up paying more in the end due to accruing interest. If you cancel gap coverage during the life of the loan, your loan payments will remain the same. The difference will go towards the loan principal. The lender would need to refinance the loan to adjust the payments.
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