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Bridge the Auto Insurance Gap

Bridge the auto insurance gap and make sure you are completely covered in the event of an accident. GAP insurance is tremendously important for auto owners comparing car insurance quotes in certain circumstances, especially those who have purchased new cars with little or no money down. GAP stands for Guaranteed Asset Protection. What it does for policy holders is provide coverage for the "gap" between the value of an automobile and what we owe on it in a total loss. It can really come in handy for drivers who are upside down due to the immediate depreciation that occurs when we drive cars off the lot. Here is a hypothetical example of a driver in need of GAP protection.

The Need for GAP Insurance

Let's say a driver purchased a truck from a dealership for $25,000 and financed it with a zero down, five year installment loan. A few months down the road he totals the truck in an accident. The insurance company says the vehicle has lost $4,000 of its original value and pays out the remaining $21,000 less deductible. Then the dealership comes in and calculates the total amount still owed including license, tax, and title at $27,500. With a $500 deductible on your collision policy, the driver faces the prospect of having to pay $7,000 out of pocket for a truck he will never drive again. This is money he could be spending on a new truck down payment, but with this bill he won't be in a new vehicle any time soon.

This scenario is made up for illustrative purposes only, but it demonstrates the importance of GAP insurance for those of us who have negative equity in our vehicles. For some drivers who put no money down and pay high rates of interest on their loans, it could take three years or longer to even get ahead of depreciation on that new truck. What a shame it would be for a total loss to occur and the owner left with nothing after making all those payments. One thing this scenario demonstrates is the importance of putting a down payment on cars and trucks, even if it is only a small amount. But for those of us who don't have the capital ahead of time, GAP insurance is the next best thing.

How Guaranteed Asset Protection Works

Guaranteed asset protection is very simple and makes for some of the best car insurance available. It is a special policy endorsement that is strictly focused on reimbursing the covered motorist for losses above and beyond the depreciated market value of the vehicle. In other words, this type of policy is only useful for drivers who owe more on their cars than they are currently worth. For folks who are able to put down a sizable down payment, GAP insurance is unnecessary.

But for drivers who take these zero down loans, especially the ones that run five and six years in length, it is important to consider GAP protection because in the early months of the loan repayment process, not a whole lot of the payment is going to principal. Unless you're in a zero interest or very low interest loan, most of that money in the early going is applied to interest. This means the amount of money we owe on the truck or car doesn't drop very fast at first, even though at this very same time the initial depreciation on a vehicle bought new off the lot is swift and severe before it begins to level out.

Guaranteed asset protection takes care of the financial difference between the book or market value of a car and how much the owner still owes on it. This type of insurance is primarily useful for cars that have not been owned for all that long and are still being financed. But there are other scenarios in which guaranteed asset protection can be of some use to covered policy holders.

Other GAP Insurance Scenarios

Sometimes buyers have to pay more than what a used car is worth, either in the purchase price or (more likely) in that purchase price plus the interest tacked on to the loan. GAP insurance is available to used cars up to two years old. It is good to have while you're trying to pay down that interest and get caught up in your equity. As a general rule it's always good to pay extra on vehicle loans if you have the money to spare. Just be sure to designate the extra payment as a principal payment, or the lender may apply it toward interest. Paying down that principal early on cuts down the amount of interest charged over the life of the loan and helps you pay the car off sooner.

Bridge the auto insurance gap between car value and principal owed with guaranteed asset protection.


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