If You Have an Auto Loan, You Need This Insurance Coverage

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Going without this coverage could be a costly mistake.


Key points

  • Many people borrow money to buy cars.
  • Borrowers could end up owing more than the car is worth.
  • It’s important to have a specific type of insurance if that happens.

Borrowing to buy a car is common and, in fact, many people take car loans they will be repaying over many years.

It’s not necessarily a big problem to take on auto debt because the interest rates are usually relatively affordable and those who can’t afford to pay cash for a car may still need a vehicle to get to work.

But, those who do have auto loans will always want to make sure they have a specific type of auto insurance coverage.

This insurance coverage is crucial for borrowers with auto loans

Any driver who has an auto loan needs to make sure that gap insurance is purchased along with their other car insurance coverage.

Gap insurance provides 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 they are not forced to pay out of pocket for a car they no longer have.

Here’s why that could be a concern. When a motorist gets into a covered collision, the insurer will either provide money to repair the vehicle or will declare it a total loss if it is too damaged to repair or if repairs would cost more than the car is worth. If the car is declared to be a total loss or if it is stolen and not recovered, the insurer will estimate what the vehicle is currently worth and will pay out the fair market value.

The problem is, the fair market value might not be enough to pay off the outstanding car loan balance. Cars can depreciate, or lose value, very fast in most cases. This is especially true with newer cars that see a rapid decline in price as soon as they are driven off the lot. And drivers routinely put only small amounts of money down when buying a vehicle and they stretch out repayment over a long time. This could mean they are slow to pay down their loan balance, even as the value of their car falls 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 the remaining balance of the auto loan off, above and beyond the amount the insurer provided to compensate the policyholder for the totaled car.

What happens without gap insurance?

If a driver has a car loan, the motorist has to pay it off — even if an accident happens and the car is completely destroyed.

As a result, without gap insurance, a driver could get stuck having to come up with 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 so that was all the insurer paid, the driver would have to pay the remaining $2,000 to the auto loan company if the car was totaled.

No one wants to end up in this situation. That’s why it’s crucial to have gap insurance coverage. Lenders will often require this, but even if that’s not true, every driver should talk with their auto insurer about getting this important protection in their policy.

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