What You Need to Know about Gap Insurance

 
Negative equity is a term that all automobile buyers should be aware of. Oftentimes automobiles depreciate at a rate faster than that at which the owner pays on the loan. This means that it is very often possible for the owner to owe the lender more for the vehicle than the vehicle is actually worth.

Since most insurance policies cover damages up to the fair market value of the vehicle, this leaves many car owners in a position of having to owe money when their car has been totaled in an accident that was covered by their insurance policy. Auto gap insurance fills this void and pays the difference between the fair market value of the vehicle and the amount owed to the lender.

Auto gap insurance is often offered by lenders and car dealers at the point of sale. While this might be an effective way to purchase auto gap insurance, be sure to do some homework and look for third party auto gap insurance providers before taking them up on their offer. It might be possible to find similar coverage for a much lower price than what you will get from the dealer and/or lender.

Auto gap insurance is only useful while the amount you owe on the loan is greater than the fair market value of the vehicle. Since the value of the vehicle drops off sharply the first couple of years and then tends to even out while the amount that the owner owes on the policy is always decreasing at a constant rate, it stands to reason that the owner really only needs auto gap insurance during the first couple of years of the loan. Any auto gap insurance purchased after the amount owed has dropped beneath the fair market value of the automobile will be wasted.