Nobody likes to lose money when replacing a car. We all know that assets,such as cars,are prone to depreciation. Sowhat does GAP insurance do?Gap Insurance (Guaranteed Auto Protection or Total Insurance) compensates you for the loss on the transaction by paying the difference between the current value of car and the amount due on the car. It is an essential policy as it gives you a financial coverif something happens to your car. Gap Insurance covers both small cars as well as huge vehicles like trucks. It is a type of insurancewhichthe owners take upin order to shield them against the loss maybe due to theft or accidents.
How does it Help?
Let us assume that you purchased a car for $16000. You make a down payment of $1000 and rest is taken by car insurance of $200. After one year of use, the value of car depreciates to $8000. Within one year, you would have paid $2400 via insurance. In case of an accident, the company is liable to pay you only $8000 whereas the dues are of $12600. Here, the Gap insurance policy come to your rescue. The Gap Insurance will address the difference of $4600, therefore, protecting you from loss on the transaction.Usually, the need for GAP insurance arises when the asset value is less than the loan value on it.
There are many customers who take up vehicles on lease. In this case, they are not buying the car straightaway but then also it is their liability in case of theft or accidents. Mostly, there is a huge difference between the amount of money invested in the car and the value of the car.
Types of Covers:
There are different types of covers provided by Gap insurance companies, in order to suit the customers need. The most commonly available are:
• Return to Value Gap:
This type of policy covers people who do not take up the policy while purchasing the car but few months later down the line. The return to value investment compensates the gap between the market value by insurance companies and the value on which you took Gap Insurance.
• Return to Investment:
This compensates for the gap between the purchase value and claim on the car insurance company.
• Vehicle Replacement Gap:
Compensates for the difference between the claim that you receive from the insurance companiesin case of damage or theft, and the cost of thepart that needs to be replaced.
Who Should Take up?
• People who have taken up the car at lease
• People who owe more than the car are current worth
• People who have made a low down payment on the car
• A car which depreciates quickly
• Cars loans with high interest rates
• Upside- Down borrowers
Who does not Need it?
The buyers who have paid a fat amount as down payment and do not owe more than the cars worth.
The volatile economic and fiscal environment has also made a huge impact on the marketplace value of cars with changing technology and rising fuel prices .The speed at which depreciation or drop in market value takes place has also increased. Therefore, if you are planning to take up a Gap Insurance, be sure of what you need and what you are expecting out of it.