what is differential insurance?
Gap insurance is an optional type of car insurance that covers the “gap” between the value of a car and what the driver owes on their car loan or lease if the car is destroyed or stolen. Without differential insurance, drivers may be forced to pay off the remaining loan or lease balance on a vehicle they can no longer drive.
key things to know about gap insurance
- gap insurance pays the difference between a car’s full value and what the driver still owes on their car loan or lease.
- Drivers should consider getting differential insurance if they made a small down payment on a loan, leased their car, or have a car that depreciates quickly.
- You can get gap insurance from your auto insurance company, loan provider, or dealer. the largest auto insurance companies in the us uu. The ones you can get gap insurance for are state farm, progressive, and allstate.
- Differential insurance costs between $400 and $700 when purchased from a dealer and between $20 and $40 per year when added to an auto insurance policy.
how differential insurance works
Gap insurance covers the dollar amount “gap” between the value of a car and what is owed on the loan or lease, in the event of an accident or total theft of the vehicle. Standard types of insurance only cover the actual cash value of the car, so an uninsured driver could potentially owe their lender thousands of dollars.
Reading: How much is gap insurance on a lease
example of how differential insurance works
Imagine buying a $50,000 car with a $10,000 down payment. Three years later, the car is worth $20,000, but you still owe $24,000 on the loan. If the car is in an accident or stolen and declared a total loss, your regular insurance policy will pay $20,000, or the actual cash value of the car, less your deductible.
If you don’t have gap insurance, you’ll still owe $4,000 and have to pay for the car even if you can’t drive it. but if you have gap insurance, you’ll pay the $4,000.
A gap forms as a result of a car depreciating faster than the loan or lease amount can be repaid. A new car loses about 10% of its value the moment you pull it off the lot and depreciates about 20% in the first year.
learn more about how gap insurance works.
when might you need gap insurance
State law does not require gap insurance, but lenders and landlords may require it. Purchasing gap insurance may also be a good idea, even if it’s not required, depending on your financial situation.
Specifically, you should consider purchasing gap insurance coverage if any of the following apply to you:
made a low down payment & have a large car loan
A small down payment creates a larger difference between what you owe and the car’s depreciated value.
you rent your car
Car leases have lower monthly payments than loans because the lessee pays much less principal each month. many leases automatically include gap coverage.
your car depreciates quickly
Some cars depreciate much faster than others. Sources like Edmunds and Kelley Blue Book can help you compare the expected depreciation of different makes and models.
you include other products in your car financing
financing extended service agreements, dealer-installed options, or debt from previous auto finances increases what you owe without necessarily increasing the value of your car.
your car has high mileage
Driving more than 15,000 miles per year accelerates the depreciation of your car.
you have a long-term loan
Long-term loans almost guarantee that the car buyer will have negative equity over a period of time. The average car loan today has a term of 72 months, according to Experian Automotive, and the longer it takes to pay off a loan, the longer it takes for loan payments to catch up with the car’s depreciation value.
how to get differential insurance
You can buy differential insurance at many car dealers, although these policies are often quite expensive. gap coverage may also be available through your lender, and its cost will be included in the total amount you finance with the loan. Similarly, leases commonly include gap coverage or a “gap liability” waiver by default.
The easiest way to purchase gap insurance coverage is through an insurance company. If your current insurance company offers gap insurance, you can add it to your existing policy. however, if your insurer doesn’t offer gap insurance, you can’t buy it as a stand-alone policy from another auto insurance company.
Learn more about where to get gap insurance.
insurance companies that offer differential insurance
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Learn more about the best gap insurance companies.
cost of differential insurance
The cost of differential insurance varies depending on where you buy it. dealers and banks charge a lump sum of up to $700 for differential insurance, making them the most expensive option. since the sum is usually added to your car loan, you will also have to pay interest.
The best deals on gap insurance are usually available from auto insurance companies, which charge as little as $3 per month for coverage. Instead of charging a lump sum, insurers include the cost in your regular premium payments.
Learn more about how much differential insurance costs.
is gap insurance worth it?
Difference insurance is worth it if you finance a car with a low down payment, have a long-term car loan, or lease a vehicle. it is an inexpensive way to protect yourself from the risk of a large expense if your car is destroyed or stolen. Plus, if you sell your car before paying off the loan and paid for gap insurance up front, you’re often entitled to a refund for the portion of insurance you didn’t use.
Just be sure to track how much your car is worth using the Kelley Blue Book guides or nothing at all if you’re paying monthly for a gap policy. once you owe less than the car is worth, it’s safe to close any gap in coverage.
Learn more about deciding if gap insurance is worth it.
video: gap insurance guide
ask the experts
To learn more about spread insurance, Wallethub posed the following questions to a panel of experts. Click on the experts below to see their biographies and responses.
1. Who Should Buy Gap Insurance? 2. Is it better to buy differential insurance through a dealer, lender, or auto insurance company? 3. When should drivers drop gap insurance coverage? 4. What should drivers look for in a gap insurance policy?