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What is Gap Insurance?
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Question:Someone recommended to me that I should get 'gap insurance' for my new car. What is that and should I really get it?
Answer:GAP insurance covers you against a significant loss if your new car is totaled in an accident. Most auto insurance policies will cover the actual cash value of the vehicle which for a brand-new car is less than what you just paid for.
Let's say you bought a $35,000 car in January, put down $2,000 and finance $33,000. After two weeks you total your car (no matter whether you are at fault or not) and you still own $33,000. However, according to KellyBlueBook your 'used' car is only worth $32,000.
The insurance will pay you $32,000 and you just lost $3,000!
Gap insurance will pay you these $3,000.
Gap insurance is most important in the early years of a loan or lease when the value of the car may be less than what you owe on it. Some manufacturers now include gap insurance in their leases. However, if you purchased using a loan, you may want to buy gap insurance.