Car insurance is often a top priority when managing your finances and protecting your assets. But have you heard of gap insurance? If the concept feels unfamiliar or overwhelming, you’re not alone.
Unfortunately, gap insurance is surrounded by various myths that can leave drivers either overestimating or underestimating its value. At SimplyIOA, we believe that understanding your insurance options is key to making informed decisions. That’s why we’re here to clear the air and debunk some of the most common misconceptions about gap insurance.
By separating fact from fiction, you’ll gain a clearer picture of whether gap insurance is right for you. Here are five of the most widespread myths about gap insurance and why they simply don’t hold up.
There’s a common belief that gap insurance is only necessary for brand-new vehicles, but this couldn’t be further from the truth. While it’s true that new cars depreciate quickly – as much as 20-30% within the first year of ownership – used cars can also lose value rapidly.
Imagine this scenario: you buy a used vehicle for $18,000 and finance it with a loan. Just a few months later, you get into an accident, and your car is declared a total loss. The insurance company determines the car’s current market value is $14,000, but you still owe $16,000 on your loan. Without gap insurance, you would have to pay the $2,000 difference out of pocket.
Gap insurance can be just as relevant for used cars as for new ones. If you’re financing a vehicle, whether it’s off the dealership lot or purchased pre-owned, gap insurance can help you avoid unforeseen financial hardship.
Many drivers assume that a standard auto insurance policy is all-encompassing, covering every possible claim scenario. However, this isn’t the case when it comes to vehicle depreciation. Auto insurance generally pays out based on your car’s current market value, not the amount you still owe on a loan.
This gap can leave a significant financial burden after a total loss event, such as an accident or theft. Without proper coverage, you could be stuck paying the difference. For instance, if your car’s market value is $12,000 but your loan payoff is $15,000, your standard insurance policy will pay the $12,000, leaving you responsible for the remaining $3,000.
Gap insurance exists to bridge the shortfall. It’s not just a supplemental policy. It’s a safety net designed to pick up where standard insurance leaves off.
One of the biggest deterrents for drivers considering gap insurance is the perception that it’s prohibitively expensive. However, gap insurance is typically very affordable, especially when you weigh its cost against the potential financial protection it provides.
For example, gap insurance from your vehicle lender or insurer might cost around $20 to $40 per year as an add-on to your existing auto policy. Compare that to the thousands of dollars you could pay out of pocket after a car is totaled without gap insurance.
Additionally, many companies offer competitive pricing that allows you to tailor your policy to your specific needs. Rather than ruling out gap insurance on the assumption that it will break the bank, take a moment to explore your options. More often than not, it’s a small investment with big benefits.
It’s true that making a sizable down payment reduces the likelihood of owing more on your car than it’s worth. But even with a significant upfront payment, depreciation can still catch up to you. The first year of ownership is critical, regardless of how much you originally put down.
For example, say you purchased a new SUV for $40,000 and made a hefty $10,000 down payment. That leaves $30,000 to finance. Within a year, that SUV’s market value could drop to $32,000 or less. If you’re in an accident, your auto insurance payout might not cover the full cost of your loan due to depreciation.
Gap insurance acts as a backup plan and ensures you aren’t caught off guard. Ultimately, a larger down payment reduces, but doesn’t eliminate, the potential need for gap insurance. It’s worth considering your individual circumstances and the risks involved.
Many drivers inadvertently assume that gap insurance is included as part of a car loan or leasing agreement. Unfortunately, this isn’t always the case. While some leasing agreements may include gap coverage, it’s not a universal feature, and many standard car loans do not offer it.
It’s essential to review your loan agreement or consult with your lender to confirm whether gap coverage is included. Assuming that you’re automatically covered could leave you facing a costly surprise in the event of a total loss. If your agreement doesn’t include gap insurance, you’ll need to purchase it separately to avoid any financial exposure.
Gap insurance isn’t just for new cars, nor is it an unnecessary expense for careful planners. It’s an essential layer of financial protection that can save you thousands of dollars when needed. Whether you’re financing a brand-new car or driving a pre-owned vehicle, it’s worth evaluating the role gap insurance could play in your overall financial strategy.
At SimplyIOA, we understand that navigating the world of insurance can feel overwhelming. But you don’t have to go through it alone.
If you need help finding the best car insurance coverage for the best price, speak to a SimplyIOA agent at 833.872.4467 or get an auto insurance quote online now.