Loan Gap Coverage
Loan Gap Coverage is a very inexpensive automobile insurance policy extra that could protect you from true financial hardship. This “gap” coverage literally covers the gap between the settlement value of your vehicle and the amount of money that you owe (the remainder of your auto loan). Obviously, it is only needed on vehicles that are not paid off. Not all U.S. insurance companies sell this coverage: you will need to ask your insurance agent about it. Allstate and Progressive are among the companies that do sell a version of it. It might also be purchased through the dealership where you buy your vehicle. You will want to compare prices and consider the likelihood of being able to collect if you have to actually make a claim.
If your vehicle is damaged beyond repair (a total loss) or stolen before it is paid off, typical automobile insurance will pay you its current market value. Since vehicles begin depreciating the moment you take possession and drive it off the sales lot, the current market value of the vehicle rarely matches the outstanding loan; especially in a depressed economy. If the amount of money that the insurance company pays you for your totaled or stolen vehicle is less than the amount left on your loan, the finance company does not just forgive the balance and let you off the hook; you are still responsible for paying off the loan. If you are lucky, this might be a few hundred dollars, but it could be thousands. Like other insurance coverages, you cannot wait until you need gap coverage to buy it. At that point, it’s too late.
Loan Gap Coverage is a first party coverage, meaning that it applies only to the vehicle on the policy for which the coverage was purchased specifically. It does not apply to a vehicle whose owner is making a claim against your policy. Conversely, if you are the insured person with loan gap coverage on your policy and you make a third party liability claim against another person who caused your vehicle to be damaged, that person’s insurance company only owes you the market value of your vehicle. If that will leave you with an outstanding loan balance, you will want to go through your own insurance company and have them then seek reimbursement from the other company after your vehicle claim has been resolved. You will still need to pay your collision deductible, but your insurance company will seek reimbursement of that from the other insurer also.
Loan Gap Coverage is not a requirement, even in regions where automobile insurance is mandatory. However, it is a very inexpensive coverage. Losing your vehicle is a traumatic event in itself; who needs to add paying hundreds or thousands of dollars for a car they can no longer use to that?
This article is written for informational purposes and is not intended to take the place of competent local legal counsel.
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