Gap Auto Insurance Explained
In an effort to encourage consumers to buy cars, finance companies are providing longer and longer loans that may extend even up to seven years. On the other hand, the value of your car depreciates rapidly. A time comes when your car has lost most of its value while the amount you owe to the finance company has hardly decreased due to the hefty interest rate they charge. So, what can you as a consumer do in a situation when motor insurance pay-outs are lower than expected? You can get GAP auto insurance, an invaluable vehicle protection plan that fills the financial gap in such a situation.
GAP auto insurance comes in handy when you are leasing a car or borrowing it. Ideal for leased or loaned vehicles, GAP auto insurance protects your vehicle during the early years of lease to bridge in the financial gap between the cash value of the car and the outstanding balance on the lease in case something happens to it. Let us assume that you decide to lease a car worth $10,000 by putting down a deposit of $1,000 and taking it home.
The balance payment you decide to pay in installments for a period of five years so that your payment plan is $1,000 per year. At the end of two years, the outstanding balance on the car would be $7,000. In case you get into a wreck by this time and decide to evaluate your car, the insurance company would tell you that its worth by the end of two years is $5,000 and that's what they are going to pay you.
Now if you decide to go back to the car dealer with $5,000, he would tell you that the value of the car is still $10,000 and with the $5,000 that you offer to pay, you would be paying only $8,000. You would still have to pay $2,000 additionally. You would thus be paying for two cars for the price of one if you decide to get a new one while the payment towards the old lease continues. However, if you had GAP insurance, the policy would have taken care of the balance amount thereby protecting you from this unnecessary financial burden of $2,000.
Unfortunately, we don't think of all these things while buying a car. As such, the value of a new car depreciates by a third in just three months, which implies that a potential gap of 20-30% is already formed between the car's actual value and its worth as per the lease agreement in such a short time. GAP auto insurance thus becomes imperative for all car owners especially if they own very expensive cars.
Several rules and exclusions are applied for GAP policies. Some of the most common rules and exclusions are as follows - financed amount of the vehicle should not exceed $100,000, GAP claim cannot be more than 120% of the car's actual financed amount, maximum limit of loss would be $50,000, and so on. Despite such rules, GAP auto insurance can still be helpful in protecting your car from depreciation.
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