How Does Gap Insurance Work

How Does Gap Insurance Work


John Campbell

Gap insurance works to relieve people of the stress that comes with total loss of a car or when your car has been stolen. It works to pay up the difference that arises from the current cash worth of the car and what is owed on the car.

How does Gap insurance work?

To effectively understand how GAP insurance works, we will consider a given scenario. Take for instance one bought a car worth $15,000 with a $300 down payment and $200 monthly installments. In the event of totaling of the car within the first year, the insurance company could determine that your car is now worth $10500. Your down payment plus the installments for such a period of six months could add up to $1500. From the initial worth of the car, you still owe $13500. The insurance determined the car s worth at $10500, the difference between $13500 and $10500 is what is referred to as the GAP . It either means you get the amount from your pocket or undertake a gap insurance policy to cater for the difference.

Situations where gap insurance works


Not every situation calls for gap insurance, but there are other situations that gap insurance would work wonders and spare you the pain of servicing a debt.

Here are a number of situations that would definitely have the gap insurance working great for you.

Individuals who buy a car and expect to end up in an upside down situation with their loan should seriously consider having the gap insurance. Such situations include;

If an individual undertakes a loan that is for 5 or more years, then they definitely are better off with gap insurance. This is because the longer the loan period the higher the risk and the wider the gap.

In the event of procuring a loan that has very high interest rates

In the event of getting a loan with very low down payment (if one undertakes a car loan but pays a high amount as down payment, they do not need gap insurance)

Gap insurance is also important in case one leases a car. Those who lease a car are often responsible in the event the car is lost or is totaled. In cases where one has leased out a car, the amount paid during the lease period is often much less than the value of the car. This makes the need for gap insurance critical for the car owner. In fact in most instances, car owners prefer to have gap insurance as a requirement in the lease agreement.

Well, take a look at your situation and determine whether gap insurance will work for you. If for sure it is the remedy you need then go for it.

John Campbell is an expert of

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