It's important that you have enough insurance to cover the loss of your vehicle in all situations. This is why your insurance provider wants to offer you gap insurance when you purchase a new car. You should definitely learn more about this unique type of auto insurance coverage to determine if it's right for you.

What Exactly Is Gap Insurance?

Guaranteed asset protection insurance is also known as GAP insurance. It's a type of coverage that is completely optional, so you do not have to pay for it if you do not want to. It's designed to cover the gap between the actual cash value of your vehicle and how much is owed on a loan or lease. Gap insurance is extremely valuable if you have a new vehicle because the value of the car drops immediately after driving it off the lot. 

Why Do You Need Gap Insurance? 

Every vehicle is vulnerable to being totaled or stolen due to something that is completely out of your control. If your vehicle ends up being totaled, the insurance provider will only pay you the cash value of the car. Since that value drops immediately, the cash value will be less than the remainder of the loan.

Without gap insurance, you would end up getting a check for the actual cash value and immediately apply it to your loan, but you would have an outstanding balance that you still need to pay. With gap insurance, you will get the full value of your loan paid off. 

What Are The Consequences Of Not Having Gap Insurance? 

Paying a loan off on a vehicle that you do not have anymore is a huge burden that you'd rather not deal with. You'll need to get a new vehicle, and that can result in two simultaneous car payments. In addition, that previous loan will still apply to your debt-to-income ratio, which can make it difficult to borrow money if you have a lot of outstanding debts. 

If you cannot secure a loan for a new vehicle, you may have to settle for a cheaper vehicle that you do not want as your replacement vehicle. This could all be avoided by having gap insurance. 

Is Gap Insurance Ever Required? 

The requirement for gap insurance will depend on if you have a loan or a lease. It is common for leasing companies to require gap coverage since you do not own the vehicle, and the insurance protects the value of the car if it were to be totaled. This prevents the leaser from walking away from a lease agreement in a situation where they total the car but still owe money on it. 

To learn more, contact a local auto insurance service.