What is Gap Coverage and Why is it Important for Car Insurance?
Gap coverage is a type of insurance that fills in the financial gap between what you owe on your car loan and the actual cash value of your vehicle in the event of a total loss or theft. Let’s say you have a car loan with a remaining balance of $20,000, but your car is only worth $15,000 based on its current market value. If your car is totaled or stolen, your primary insurance company will only pay you the actual cash value of $15,000. This means you are still on the hook for the remaining $5,000 of your car loan. This is where gap coverage comes in. With gap coverage, the insurance company will pay the difference between what your primary insurance company covers and the amount you still owe on your car loan. In this scenario, if you have gap coverage, your insurer would pay the $5,000 remaining balance, ensuring that you do not have to come out of pocket for the difference. Gap coverage provides peace of mind by protecting you from having to pay off a car loan for a vehicle that is no longer in your possession. It is particularly beneficial for those who have financed their vehicles with small or no down payments, as they may owe more on their car loan than the vehicle is actually worth. Gap coverage helps prevent a financial burden in the unfortunate event that your car is totaled or stolen.
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