Borrow to buy a car is common and, in fact, many people take out auto loans that they will repay over many years.
It’s not necessarily a big deal to take on auto debt, as interest rates are usually relatively affordable and those who can’t afford cash for a car may still need a vehicle to go to work.
But, those with car loans will always want to make sure they have a specific type of car insurance coverage.
This insurance coverage is crucial for car loan borrowers
Any driver with a auto loan must ensure that gap insurance is purchased at the same time as his other auto insurance coverage.
Gap insurance offers a very specific type of protection. If a driver with gap insurance is involved in a car accident or their car is stolen or otherwise destroyed, it ensures that they don’t have to pay out of pocket for a car they no longer have.
Here’s why that might be a concern. When a motorist is involved in a covered collision, the insurer will provide money to repair the vehicle or declare it a total loss if it is too damaged to repair or if the repairs would cost more than the value of the car . If the car is declared a total loss or if it is stolen and not recovered, the insurer will estimate the current value of the vehicle and pay the fair market value.
The problem is that the fair market value might not be enough to pay off the outstanding car loan balance. Cars can depreciate or lose value very quickly in most cases. This is especially true for newer cars which see their prices drop rapidly as soon as they are pushed out of the lot. And drivers usually pay only small amounts of money when buying a vehicle and they spread the repayment over a long period. This could mean that they are slow to pay off their loan balance, even though the value of their car is dropping rapidly.
If the insurer pays less than the money that is owed on the vehicle, gap insurance will come to the rescue. The coverage pays off the remaining balance of the car loan, beyond the amount provided by the insurer to compensate the policyholder for the total of the car.
What happens without gap insurance?
If a driver has a car loan, the motorist must repay it, even if an accident occurs and the car is completely destroyed.
Therefore, without gap insurance, a driver could find themselves stuck having to find the difference between the loan balance and what the insurer will pay. If the driver owed $15,000 and the car was worth $13,000 and that was all the insurer had paid, the driver would have to pay the remaining $2,000 to the auto loan company if the car was total.
No one wants to find themselves in this situation. This is why it is crucial to have gap insurance coverage. Lenders will often require this, but even if this isn’t true, every driver should talk to their car insurer about getting this important protection in their policy.
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