Many auto dealers offer low-downpayment options in an effort to sell more vehicles. Because vehicles depreciate quickly, early in the loan term you could end up owing more money than the vehicle is worth. This can be a serious problem if your vehicle is totaled in an accident early in the life of the loan or lease.
An Example of Loan Gap Coverage
Auto insurance companies pay the “actual cash value” (similar to “book value”) of your vehicle. Here’s an example: your dealer offers a sweet “no money down” incentive on a $32,000 vehicle. You total it 3 months later in an accident. The book value is $28,000, but you owe the bank $31,000 on the loan. The bank comes looking for $3,000. Uh-oh.Luckily, you bought loan gap coverage, so the insurance company pays you the amount you owe – regardless of what the vehicle was worth. Not bad, huh?
Some Restrictions Apply
- Most insurers only sell loan – lease gap coverage in the first few months you own the vehicle.
- Coverage usually “drops off” after 36 months. By that time, hopefully your loan is no longer “upside down”.
- Your vehicle has to be a total loss.
- Of course, you have to buy collision coverage on the vehicle.
- Loan-lease gap coverage usually costs an additional 6-8% of the physical damage coverage on the vehicle.