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If you're paying off a car loan, it's possible that your car is worth less than what you owe on your loan. This is also known as being "underwater" or having negative equity. Being underwater on your car loan typically means that if your car is totaled or stolen, standard insurance will only cover the value of the car, not your full loan payoff amount.
But that's not the case when you have guaranteed asset protection, or gap, insurance. With gap insurance, the money to pay off your outstanding loan balance comes from your insurer, and not out of your pocket.
Gap insurance may already be included in your lease or financing arrangement. If not, you can buy gap coverage if the car is fairly new and you're the original owner.
What Is the Timeframe for Buying Gap Insurance?
Rules vary from one insurer to the next, but you usually can't buy gap insurance for a car that's more than two to three years old. If you do have gap insurance, it may expire after that timeframe.
Some insurers may also require you to purchase collision and comprehensive coverage before getting gap coverage. If your car is used, or you aren't the original owner, you typically won't be able to buy gap insurance at all.
Should You Buy Gap Insurance?
Gap insurance is worth looking into if the amount you owe on your loan is higher than your car's value, or you're worried that may happen. You're likely to go underwater if any of the following scenarios applies to you:
- You bought your car within the past year.
- Your down payment was less than 20%.
- You have a long repayment period of 60-plus months.
- You rolled debt from your old car into your new loan.
- Your make and model of car tends to lose value quickly.
- You put a lot of wear-and-tear on your vehicle.
Regardless of the cause of your negative equity, gap coverage is probably worth purchasing if you can't afford to pay back the difference between your loan amount and your car's value. The insurance is unlikely to make a big dent in your pocketbook (policies can be had for as little as $20 per year, according to the Insurance Information Institute), but they can save you a bundle if you end up needing the coverage.
Where Can You Buy Gap Insurance?
Before you start hunting for a quote, check to see if gap coverage was included in your financing. This is likely to be the case if you leased your vehicle.
If your financing didn't include coverage, the easiest way to buy it is through your current auto insurer. You can start by contacting the company to request a quote on the additional insurance coverage. Adding gap insurance to your policy is generally very affordable, and shouldn't be too much of a hassle to add to your policy.
If gap insurance isn't available through your current insurer, you may want to consider switching companies or going another route. Several nationwide and online insurance companies offer gap coverage, including Progressive, which charges an average of $5 per month, or $60 per year. You can also go through a dealership, but you could end up paying a price on the higher end of the spectrum.
Saving Money on Insurance
Shopping around for the best quote can save you money on insurance coverage, and so can working on your credit. In many states, insurers are allowed to consider your credit when deciding to take you on as a customer and when deciding your rates. Where it's considered as a factor, better credit can help you nab lower premiums.
If you're not sure what condition your credit is in, consider pulling your free credit report and scores before contacting your insurance company. Taking the extra step to improve your scores could ultimately save you money on your car insurance premiums, not just gap insurance.
Many factors impact your premiums, however, including how experienced you are as a driver, the number of miles you drive and whether you have any accidents or moving violations in your history. Staying safe on the road and taking other steps to save on car insurance can make a big difference in your finances. If gap insurance sounds right for you, it could also be a very wise financial move.