How does Gap Insurance work?

Gap insurance can usually be purchased from a car dealership, but is often found cheaper online from individual providers. Many users opt to purchase it at the dealership alongside their investment so everything is under one roof, for ease and simplicity. However, this is not always the best financial decision to make.

What is gap insurance?

So what is gap insurance? Gap insurance aims to pay the difference between the actual cash value and the amount that you owe on the vehicle to your finance provider. The benefit of this is that you do not end up losing money on your vehicle if it is written off or stolen, and provides an extra piece of mind on your vehicle investment. As cars depreciate quickly, it can be easy to lose a fairly significant amount of money if you do not have this insurance in place, so make sure you are being proactive.

When and where do you usually find this product?

As previously mentioned, gap insurance is usually sold by car dealers, but is often found cheaper online. Although it can be tempting to take this insurance out of the garage you purchased your car at, it will save you a significant amount of money over the long run if you shop for it online. It is a great investment that will pay off in the case that an unfortunate event does occur, and it is especially beneficial if you still have a large amount of money to pay off on your car.

When is gap insurance most valuable?

There are a few situations in which gap insurance can be more valuable to you than others, for example, if you have financed a car and made little or no down payment. In this case, you will be upside down in your auto loan the moment you drive off the court, therefore this insurance will help protect you financially and prevent you from ending up owing a finance company a large sum of money. Another similar circumstance is when you have traded in an upside-down car, therefore owing even more on the current car you own, leaving you in significant debt if anything were to happen.

Other instances when it could be beneficial for you to take out gap insurance is if you plan to put miles on your car quickly, or if you have bought a car with a bad resale value. Miles are the quickest way to devalue your car significantly over a short space of time, therefore having this can help protect your finances.

Another reason you may want to take out gap insurance is if you have taken out a policy that is repayable over a long period of time, e.g. 60 Months. A long-term loan usually takes longer to reach break point, which is when the car value and loan balance equalise.