When you finance a new or used vehicle, the bank or lender puts up the money to buy the car in exchange for the agreed-upon monthly payments. If you total your vehicle and its value doesn’t cover the rest of the loan, you must pay the balance out of pocket.
With a gap or guaranteed asset protection insurance, you will have coverage for this situation and avoid a substantial personal cost in the event of a total loss. With most insurance companies, you can add gap insurance if you also have comprehensive and collision policies. Review this guide if you think you may need gap insurance for a used car.
how differential insurance works
To understand gap insurance, it’s important to understand that cars depreciate or lose value as soon as they leave the dealership lot and continue to lose value over time. Let’s say you currently owe $15,000 on a loan you took out to buy a late-model used car last year. he has an accident and destroys the vehicle, but his insurance company says the car was only worth $13,000. gap insurance would cover the $2,000 to pay your auto lender; otherwise, you’ll owe the balance and have to come up with cash.
Usually, the insurance company will total your vehicle when it would cost more than it is worth to repair it. Most insurance companies total a vehicle when the repair estimate reaches more than 75 percent of the car’s actual cash value.
insurers use sources like kelley blue book and the nada rating system to decide if your car is a total loss and will tell you how they came to that conclusion, based on factors like make and model, mileage, and vehicle status. If you disagree with the actual cash value established by the insurance company, you may need to file a lawsuit to claim a higher settlement.
While loan companies require you to have comprehensive and collision insurance on a financed vehicle, they generally do not require gap coverage. however, if you lease a vehicle, the leasing company may automatically include this type of coverage in the cost of the lease.
where to buy differential insurance
bankrate advises that you have three options if you want to buy differential insurance. you can buy it from your auto lender as part of your loan payments, but that means you’ll also pay interest on your policy premium. You can also buy it from a gap insurance company or your existing auto insurance provider, allowing you to avoid paying interest.
Major insurance companies offering policies without coverage in many states include Travelers Insurance, Safeco, National Insurance, Liberty Mutual, Auto Owners Insurance, and American Family. USAA, which writes policies for the military and their families, also provides this type of coverage.
To qualify for gap insurance, you generally must purchase a policy within three years of purchasing your car. Your vehicle may be second-hand, but it should generally not be more than two or three years old. Some companies write gap policies only for the original owner of a car.
who should buy gap insurance
finance blog nerdwallet recommends differential insurance for people who:
- rent a car
- finance a car for more than 60 months
- buy a new car
- buy a car for less than three years
- borrowing more than the value of the car after license, taxes, extended warranties, and negative trade-in capital
- financing a car without a 20 percent down payment
- buy a car that will quickly depreciate in value
In these situations, you may owe more than the car is worth until you make enough payments to raise equity. On the other hand, you can probably opt out of gap insurance if you finance a car for less than 60 months, make a down payment of at least 20 percent, or choose a vehicle that experiences minimal depreciation.
the cost of gap insurance
according to investopedia, you’ll probably pay a few extra dollars a month or up to $40 a year for gap insurance. however, this cost varies based on your driving history and the value of your vehicle. The website recommends getting quotes from at least three insurance companies before choosing a gap insurance policy. Typically, the insurance company charges about 5 to 6 percent of your comprehensive and collision insurance premiums, also required by your lender.
If you buy a gap policy through your lender, you can expect to pay between $500 and $700 as a one-time fee. gap insurance from a third-party company typically costs around $300.
alternatives to differential insurance
autoinsurance.org advises that there are alternatives if you can’t qualify for gap insurance on your used car. One of those options is loan and lease payment, which is similar to gap insurance but is also available for older used cars. Instead of paying your full loan balance as gap coverage, this type of coverage will pay about 25 percent of your car’s value in addition to your full or collision payment for your vehicle. you can get the loan and lease payment if you have progressive farmers insurance or insurance.
You can also consider new car replacement, although this program is generally only available for vehicles that are less than three years old. With new car replacement, you pay the deductible if you total the vehicle and the coverage pays the value of a new car of the same make and model as your old car. Many insurance companies offer new car replacement or gap coverage, but not both. Some of the insurance companies announcing a new auto replacement program include Travelers Insurance, Safeco, Liberty Mutual, Farmers Insurance, and Allstate.
Before you buy a used vehicle made within the last three years, explore differential insurance on your used car if you plan to take out a loan.
gap insurance: what is it and who needs it
Do you really need gap insurance?
Should I get differential insurance on a used car?
How does gap insurance work after a car is totaled?