If you have an auto loan, depreciation of the car may cause you to owe more than the vehicle’s value. If you total the car before you repay the loan, you remain responsible for the balance.
Gap insurance provides financial protection from this situation by paying off your auto loan in this situation. Learn more about how this type of insurance policy works in Texas.
Benefits of gap insurance
Your loan balance will probably exceed the value of your vehicle at some point if you have a repayment period of longer than five years or you did not put down at least 20% on the original purchase. You could potentially owe thousands of dollars if you total a new or late-model used car in the first few years after purchase. In contrast, Car and Driver magazine reports that the average gap policy costs about $7 a month as an auto coverage add-on.
How to buy gap insurance
You can buy gap insurance through your regular auto insurance company or through the lender or dealer when you purchase a vehicle. Carefully review the terms of this type of policy, particularly if you decide to get it from the car dealership. Many policies have exclusions that limit your ability to file a claim if you have existing vehicle damage or outstanding loan payments.
You can cancel gap insurance when you pay down your auto loan below the vehicle’s current value. Periodically check a source such as Kelley Blue Book to estimate the worth of the car and act accordingly.