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Is Gap Insurance Necessary For Your Auto Loan?
By EchoBay Loans Staff Writer

In a simple word, the answer is yes. When you buy a new vehicle, the value drops dramatically the minute it is driven off the lot. The amount of depreciation varies depending on the model you buy but it could be as much as 20%. If you didn't put down a large down payment, you could already be in an upside down loan. An upside down car loan is where you owe more on the loan than the car is worth.

If at this point you totaled the car or it was stolen, you could be left owing thousands of dollars on a car you no longer drive. Many people mistakenly believe that their traditional car insurance will cover their car loans if the car is totaled but this is not the case. Your car insurance will only pay for the value of your car, not the amount of any auto loans.
This is where auto gap insurance comes into play. There are many advantages to taking out an auto gap insurance policy.

Your auto loan will be paid off
Auto gap insurance pays the difference between the value of your car and the amount of your auto loans. If the car is worth $20,000 but you owe $23,500 on your auto loan, the auto gap insurance will pay the difference of $3,500. Without auto gap insurance, you would be stuck paying $3,500 in auto loans for a car you no longer technically own. You should check your policy to find out exactly what your policy covers. Policy coverage can range from covering just one situation to covering all possible scenarios. Many feel most comfortable with a policy that covers any auto accident, stolen vehicle and/or damage by a natural disaster.

The coverage is inexpensive
The good news is that auto gap insurance is fairly inexpensive. Many insurance companies base the price as a percentage of the amount of your comprehensive and collision coverage. The percentage is anywhere from 1-5% of this amount resulting in very low premiums. The downside is that not all companies provide this coverage and many companies require that you have your auto policy with them as well.

Your auto dealer also offers auto gap insurance and will most likely try hard to sell you on the coverage. You are much better off going to your insurance agent for this coverage. While the auto dealer offers it, it is marked up to provide quite a profit for the dealer. You can get the same coverage for much less from an agent. An easy way to shop for coverage is online. Rates are sometimes even less online as the companies do not have the overhead your local agent does.

You do not need the coverage for your entire loan term
Many times auto gap insurance is only needed for a limited amount of time. At the point that your vehicle is worth more than you owe on your car loans, you can cancel the coverage. The coverage is worthless once this happens. Many people only need to keep the coverage in place for the first few years of their auto loan.

A few reminders…
Keep in mind that most insurance companies require that the car has never been titled before and that you take out the coverage at the same time as your regular auto insurance policy. Auto gap insurance is not a policy that can be added later.

Also, if you lease your car, in all likelihood this policy is required and many dealers include it. Check with your dealer to see if this is already included or if it is coverage you should seek out on your own. Sometimes with leased vehicles, the terms vary slightly and you may have to continue to make your monthly payments until the lender receives the difference from your insurance provider.

With the peace of mind that auto gap insurance provides for such minimal cost, it is a great policy to add to your car. Just be sure to seek it outside of the dealer's showroom. A great place to shop is online because you have access to many insurance providers at once.

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