Most drivers are fairly familiar with different types of automobile insurance coverage. For example, there is liability insurance, which covers the costs of medical bills and property damage resulting from an automobile accident that is deemed to be your fault, whereas collision insurance deals with repairs to your own car. You may also elect to carry comprehensive insurance, so named because it covers virtually any other type of damage or loss (flood, theft, hitting a deer, etc.). But most people are more familiar with something called full coverage insurance. Anyone who buys a new car and takes out a loan to do so has to carry full coverage insurance, at least until they’ve paid off their loan and they have the pink slip in hand. And while the definition of this type of policy varies from place to place, it generally includes all three of the types of coverage listed above (and potentially other extras) because the bank still wants to get paid in the event that your car is damaged beyond repair. The only problem is that automobile insurance doesn’t always match the amount you owe. This is where gap coverage comes into play.
The “gap” in your auto insurance is fairly simple to determine. When you take out a car loan, you pay it off on a schedule. But what you owe on your loan at any given time does not necessarily coincide with the actual value of your vehicle. As you are probably aware, cars tend to depreciate in value very quickly, and your insurance is based on the value of your car. Suppose, for example, that you purchase a brand new Nissan Maxima for about $31,000. You’ll likely have some trade-in value from an old car and you may have some money down, but for the sake of argument, let’s just say you take out a loan for the sticker price. From there you’ll start making payments, most of which will likely go towards the interest at first, and in five to six years you’ll pay off your car.
But during that time, the car will continue to lose value. So suppose you were to get into an accident during the first year of owning your car. You might still owe $27,000, but the value may have dropped down to $22,000, just for example. And if the car is totaled and completely beyond repair, your full coverage insurance will pay out the value of the car at $22,000, leaving you owing the bank $5,000 for a mangled mess of metal that has no value. You can’t squeeze blood from a stone, so you’ll end up with no car and $5,000 worth of debt. Gap coverage is the simple solution to this problem. It covers that gap that exists between the value of your car and what you still owe.
Of course, you need to think about the cost versus the reward before you elect to carry gap coverage. If you don’t owe that much on your car and you’re determined to pay it off quickly, there might not be any gap between your loan amount and your vehicle’s value. Or it might be so small that it doesn’t make sense to pay extra for gap coverage (i.e. you’d pay less in the event of total destruction of your car than you’ll pay for the coverage if you don’t have an accident). You’ll simply have to look at what you owe, compare it to your car’s value over time, and call for gap car insurance quotes for Arkansas, Alaska, or your state of residence to see how the numbers add up. But knowing that gap insurance is available could just ensure that you have the information and the policy you need should you end up in an accident that totals your car.