As soon as you purchase a vehicle and drive it off the lot, the vehicle begins to depreciate in value. Very few things depreciate as quickly as a new car, and most people must maintain payments on the vehicle for a long time in order to pay it off. At some point, you may owe more for your vehicle than it is actually worth. This is why carrying gap insurance is imperative any time you finance or lease a new car or truck.

Vehicle Depreciation and Total Loss

Whenever your vehicle is involved in a serious collision, it runs the risk of becoming a total loss. A vehicle is considered totaled if it is impossible to repair safely or if repairs would cost more than the vehicle is worth. Whenever a vehicle is in a roll-over accident, sustains heavy engine compartment damage, catches fire, is submerged in water or has all airbags deployed, it runs a risk of being a total loss regardless of its value.

As a vehicle begins to depreciate, the total loss price becomes lower. Older model vehicles could become totaled even if they are still driveable. In some cases, vehicles that don’t retain their value well will end up losing value rapidly, long before you have paid off your auto lien.

If your vehicle is deemed a total loss, your car insurance company will pay you for the actual cash value of the vehicle. This means that the vehicle will be assessed at its replacement value for the condition it was in prior to the loss. The actual cash value of the vehicle may be substantially lower than what you owe on the vehicle, depending on the details of your lien.

How are car insurance claims paid?

Whenever you are making payments on a vehicle, you are not the vehicle’s rightful owner; the vehicle belongs to whoever financed the purchase of that auto. This is why you must maintain full coverage auto insurance until your vehicle is paid off: The lien holder’s interests must be protected.

If you are involved in an auto accident with a financed vehicle, the payments go toward the repair of the vehicle. If the vehicle cannot be repaired, the claims settlement is issued to the lien holder to go toward paying the remaining balance of the loan. If your auto is worth more than the loan balance, you will receive the difference. If, however, the vehicle is worth less than the remaining balance, you will be responsible for paying the difference to your financing company.

The difference can sometimes account for several thousands of dollars, putting you in the position of paying a car payment on a vehicle you no longer own. You may also need to purchase a new vehicle, causing you to pay twice as much in car payments each month. You might not qualify for a good auto loan if you have an outstanding balance due to a total loss claim, as well.

What is Gap Insurance?

Gap insurance pays for the discrepancy between a vehicle’s value and the remaining balance of your loan. Essentially, whenever your vehicle is deemed a total loss, the gap insurance bridges the gap between the vehicle’s value and what you owe on it so that you don’t have to pay that money out of your pocket.

Usually, gap insurance is purchased from the dealership or the financing company directly. The cost will be added to your monthly car payment. If for some reason your financing company does not offer gap insurance, you may be able to obtain this coverage from your auto insurance company.

Most car insurance companies will not automatically provide gap insurance, however, so you will need to ask for it specifically. When purchasing a new vehicle, be sure to ask who will be providing this coverage and if you need to obtain it from your own insurance provider. If you do need to purchase the coverage, you can ask your agent or insurance customer service representative to add this to your full coverage insurance.

Either way, gap insurance should be fairly inexpensive as new vehicles have a fairly low chance of being totaled; the low risk associated with the gap coverage will keep the price affordable.