Gap Insurance, or what is also referred to as Gap Protection, covers the difference between what you owe on your car and how much the car is worth. Here’s one example of how it works:
Let’s say you buy a car for $20,000. You put down $500 and your payments are $350 per month. Six months after buying your car, you have a car accident (which is not your fault) and your car is totaled. Your auto insurance determines that your six month old car is now only worth $16,500, and they will pay you the difference on your deductible; however, you still owe $17,400 on your car loan. If you have Gap Insurance, the difference will be covered; if not, that difference will come out of your pocket.
How do you know if you need Gap Insurance? In most instances, it is ideal for people who are likely to be “upside down” on their auto loan. Some contributing factors to being “upside down” include the following:
Taking out a loan with an extended term.
A longer loan term may mean lower payments, but it also means that you will build equity in the vehicle much more slowly.
Owning a car with a faster depreciating value.
All cars depreciate. According to some estimates, certain cars lose as much as 30% of their value within the first three months. You should find out how well the car you would like to purchase holds its value. If it depreciates faster than others, that should be a factor in whether or not you obtain gap insurance.
Putting little or no money down.
If you finance all (or nearly all) of the price of your car, you could literally be upside down on your loan the minute you drive home.
Borrowing more than the purchase price.
People who borrow more than the purchase price (e.g., extended warranty or service plans, tax, license, registration, etc.), will find themselves upside down prior to leaving the car lot.
Gap Insurance is not expensive. If you find yourself in a situation where you will be upside down on your loan, it is worth the cost. In most instances, you can obtain Gap Insurance for pennies on the dollar, and it can be financed directly into your auto loan.
For more information about Gap Insurance, visit BancorpSouth Insurance Services at www.bancorpsouth.insuranceaisle.com for a quote today.
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