Understanding Gap Insurance

The most significant aspect that differentiates a person who owns a car and a person who takes it on a loan is gap insurance. Gap insurance policy actually covers the gap between the lease amount and the amount provided by the insurance company at the times of vehicle theft or damage. This particular insurance coverage type has been designed so as to protect the investment.

There are several companies offering gap insurance. Many times, gap insurance is included in the lease agreement. Gap insurance is required when the buyer has taken the vehicle on lease without even making 20 percent down payment. Other situations where gap insurance is required include car finance that has been continuing for the last four years or when the existing car loan amount also includes the debt on the previous car.

According to the market, the value of a vehicle depreciates as soon as it is purchased from the dealer. This value is further lowered once the vehicle meets an accident. Depending on the damage and the cause of the accident, insurance companies determine the amount to be reimbursed towards insurance claim. After deducting this amount from the actual loan amount, the consumer is now left with the option of paying the remaining loan amount. This amount could be substantial on numerous occasions that could leave the customer in a financial crunch. Gap insurance protects customers from such situations.

However, gap insurance is not required for every individual who has purchased a vehicle on loan. Gap insurance is not required when the regular insurance policy has the option of paying off the entire finance amount in case of damage or theft.