Understanding Gap Insurance And How It Protects Your Losses In An Accident

If you have finally saved up enough cash and are ready to make a down payment on your new dream car, then it is important you know about a special automotive insurance coverage option referred to as "gap insurance". As the name implies, automotive gap insurance is meant to cover your losses if your new vehicle is totaled in an accident and the payout from your automobile insurance is less than the balance due on your auto loan. 

Since gap insurance is a complicated topic, here is information to help you understand it better:

Understanding Your Automobile Loan

When you purchase a new vehicle with financing, then you are agreeing to pay back the entire loan amount plus interest to the bank or financial institution who loaned you the money. The car is used as collateral for the loan and if you don't make your payments as promised, then the financing company will repossess the vehicle to recover some of their losses. The finance company will sell the car at auction and you are responsible for the balance of the loan.

However, if you make your payments as promised and are involved in an accident where your vehicle is totaled out by the insurance company, then the finance company will be paid the current Kelly Blue Book value of the car and you will be responsible for the balance of the loan. While you might believe the insurance company will just pay off the car, this isn't the case unless you have gap insurance.

Understanding Traditional Automobile Insurance Coverage

Even if you have comprehensive and collision insurance coverage for your vehicle, then you might assume you are covered for the entire value of your vehicle in case you are in an accident. While you are covered for the current market value of the car, you are not covered for the total loan you have outstanding if it is higher than the value of the car.

Understanding How Gap Insurance Protects You Against Loss

To have complete coverage for your loan and your vehicle, you should purchase specialty gap insurance. This special insurance covers the difference between the current market value of your car and the payoff amount for your auto loan. This is very important because your new car will depreciate in value faster than you can pay off your car loan. As the value drops, then you are at a bigger risk of having to pay money for a car you no longer own if you are involved in an accident. 

Obtaining Gap Insurance

Finally, it is important to note that not all automotive insurance companies offer gap insurance to their clients. When you are searching online using an insurance finding tool, make sure you include gap insurance in your search criteria.

To learn more, contact a company like Marcus Steven M Inc.