Everything You Need To Know About GAP Insurance For Your Car
Most car insurance protects your car - a car you own, or at least, are paying off until it becomes yours. If you're leasing a car, or borrowing it, the rules change. That's when GAP insurance becomes so handy.
GAP insurance is a kind of insurance for leased or loaned vehicles that protects them during the early years of the lease. If something happens to your car, GAP insurance will pay the "gap" between the cash value of the car, and the outstanding balance on the lease. Here's an example to help you visualize: You want to lease a car that costs $10,000. You put down a deposit of $1,000 on the car, and drive it off the lot. Your payment plan is $1,000 a year for 5 years After 2 years, the outstanding balance on the car is $7,000.
Now, lets say you get into a wreck after 2 years, and total the car. The insurance company values the car, and tells you, "Hey, it's been 2 years. That car is only worth $5,000. That's what we're paying for it." You walk back to the dealership with $5,000, and they say "Too bad. We still value the car at $10,000, You've paid $8,000, counting this new insurance money. You owe us $2,000 more."
In cases like this, your only option is to continue to pay off the old lease while you get a new car (meaning, you're paying for two cars for the price of one). If you had GAP insurance, however, the GAP policy would pay for that $2,000 discrepancy.
Unfortunately when leasing a car, a lot of us fall victim to the immediate devaluation of a car once we drive it off the lot. A typical new car decreases in value by a third after only 3 months. That means that after three months of leasing a car, you're already looking at a potential gap of 20-30% between what the car is actually worth, and what your lease agreement says its worth. The more expensive the car, the more crucial GAP insurance can be.
As you've probably been able to figure out by now, the potential for insurance fraud is huge with GAP insurance. That's why there are a lot of possible exclusions and rules when it comes to GAP policies. Here are some of the most important:
-Your maximum limit of loss is generally only $50,000 -The maximum APR you've agreed to is 12.5% -The claim doesn't settle late charges or credit penalties -The financed amount of the car cannot exceed $100,000 -A GAP claim will normally not exceed 120% of the car's original financed amount. If you include factors like credit life or service contracts, you can squeeze in an additional 30% of value allowable, but that's it.
But even with these exceptions, a GAP insurance policy is still a good way to protect a leased car from bureaucratic bickering. Talk to your insurance company and see what option is best for you.
About the Author
George Jackson comes from an insurance family and he loves cars. Combining those two means he gets to do what he enjoys when helping others with auto insurance on line. Learn how to secure your valuable vehicles and control expenses by going to: http://thecarinsuranceblog.org/
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