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Gap Insurance: A Financial Safety Belt
By: Peter Garant
Why is gap insurance considered as a financial safety belt? Simply put, it keeps
you from being financially ruined when disaster hits your car. For example you
are in this situation, you bought a late-model car three months ago using a car
loan with a regular car insurance. The car costs $30,000 and you have already
made three payments of $900 each month. Then, disaster strikes. An electric post
falls and slams down on your car. The car was flattened to half its height.
Immediately, you reported it to the auto insurance company, which they in turn
play with numbers, mileage, depreciation, market values, and other related
stuff. After a couple of days, the adjustor informs you that the worth of your
car at the time of the accident is $25,000. This is the amount that the auto
insurance company will provide you. But the finance company that gave you the
loan will still consider the car to be worth its original price. They also play
with numbers, interest rates, taxes and license fees. Then they come up with the
amount of $38,000. This is the amount that you need to pay them. If the auto
insurance company releases the $25,000, where will you get the remaining $7,000?
Your car is already a wreck but you still owe the finance company.
You need not face such a dilemma if you have a gap insurance. With the gap
insurance, you can ignore the difference between the amount covered by the
regular car insurance and the amount you owed the car loan company. This
difference is called a “gap” and the gap insurance bridges it so that you need
not rack your head for additional financial resources.
A car lease contract must also have a gap insurance. It is a feature that
prevents you from draining all your finances. Some dealers who lease cars don’t
offer a gap insurance. This is okay as long as they include a “gap waiver” in
their lease contract. This waiver declares that you are no longer responsible
for gap charges that may occur when your leased car is wrecked.
When you get a gap insurance, determine how much is offered in the gap policy.
You should also know how much will be added to your monthly bill. A gap
insurance, for it to be recognized, must be accompanied with comprehensive
insurance policies that cover collision.
Sometimes, a gap insurance may no longer be needed if the terms in your regular
auto insurance policy indicated that the company will pay off the full amount
you owed from the car loan lender.
About the Author:
Peter Garant is writing articles about bad credit for his credit repair kits
blog and articles about car loans for his family finance site.
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