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Do You Need Gap Insurance for a Financed Car?

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When purchasing a new car, particularly one that is financed, it’s essential to make informed decisions about insurance coverage. Among the many options available, gap insurance often emerges as one of the most crucial yet misunderstood choices. If you’re financing your car, you might wonder whether this coverage is necessary. In this article, we’ll break down what gap insurance is, why it matters, and help you decide whether it’s the right choice for you. Whether you’re a first-time car buyer or someone looking to upgrade their vehicle, understanding gap insurance could save you from significant financial stress in the long run.

What Is Gap Insurance and How Does It Work?

To understand whether you need gap insurance for a financed car, it’s essential to first grasp what it entails. Gap insurance, short for “Guaranteed Asset Protection,” is an optional car insurance coverage designed to cover the difference between what you owe on your car loan and the car’s actual cash value (ACV) in the event of a total loss.

When you drive your car off the dealership lot, its value begins to depreciate immediately. In fact, most new vehicles lose as much as 20% of their value within the first year. If your car is totaled or stolen, your standard auto insurance policy will typically reimburse you only for the car’s current market value, not the amount you still owe on the loan. This is where gap insurance steps in. It bridges the “gap” between your car’s depreciated value and the outstanding balance on your loan.

For example:

Scenario Without Gap Insurance With Gap Insurance
Loan Amount: $30,000 You owe $5,000 out-of-pocket to cover the loan balance. The gap insurance covers the remaining $5,000.
Car’s Current Market Value: $25,000 You receive $25,000 from your auto insurer for the car’s ACV. You receive the full amount to settle the loan balance.

This additional coverage ensures you won’t be left paying off a car you no longer own.

Why Is Gap Insurance Important for Financed Cars?

When you finance a car, you’re essentially borrowing money to pay for it over time. This means you’ll likely owe more on the vehicle than it’s worth for a significant portion of your loan term. This situation, known as being “underwater” or “upside down” on your car loan, can put you in a vulnerable financial position if an unexpected event occurs.

Key Reasons to Consider Gap Insurance:

  1. Immediate Depreciation: The moment you drive off the lot, your car’s value drops. In the first year alone, depreciation can reduce your car’s worth by thousands of dollars, leaving you financially exposed.
  2. High Loan-to-Value Ratio (LTV): If you financed your car with little or no down payment, you’re more likely to owe more than the car’s current market value, especially in the first few years.
  3. Total Loss Situations: In case of an accident where your car is declared a total loss, your standard auto insurance will only cover the depreciated value of the car. Without gap insurance, you’ll need to pay the remaining balance out of pocket.
  4. Peace of Mind: Having gap insurance for a financed car provides peace of mind, knowing that you’re fully protected against financial burdens stemming from your car loan.

By opting for gap insurance, you’re ensuring that unforeseen events don’t derail your financial stability.

Who Should Get Gap Insurance?

While gap insurance isn’t mandatory, it is highly recommended in certain situations. Understanding whether it’s the right choice for you depends on your unique financial and car ownership circumstances. Let’s explore the scenarios where gap insurance makes the most sense:

1. Financing a New Car:

If you’re purchasing a brand-new vehicle, the rapid depreciation rate makes gap insurance a wise investment. Cars lose value faster in the first few years, and without gap coverage, you could face significant out-of-pocket expenses in the event of a total loss.

2. Making a Small Down Payment:

Buyers who put down less than 20% of the car’s purchase price are more likely to owe more than the vehicle’s market value during the loan term. In this case, gap insurance ensures you’re not left in debt.

3. Long Loan Terms:

If you’ve opted for a longer loan term (such as 60 or 72 months), the risk of being upside down on your loan increases. Gap insurance can provide protection throughout this extended period.

4. Leasing a Car:

Gap insurance is often included or required in leased car agreements. This is because the leasing company wants to protect its financial interest in the vehicle. Be sure to check whether gap insurance is included in your lease terms.

5. Vehicles with High Depreciation Rates:

Certain car models depreciate faster than others. If you’re financing a car with a historically high depreciation rate, gap insurance becomes even more critical.

Advantages of Gap Insurance

Beyond its primary purpose of covering financial shortfalls, gap insurance offers several advantages that make it a valuable addition to your auto insurance policy:

  • Financial Protection: Eliminates the risk of being stuck with a large loan balance after a total loss.
  • Affordable Add-On: Gap insurance is relatively inexpensive compared to the potential costs of not having it.
  • Simple to Obtain: You can purchase gap insurance through your car dealership, lender, or an independent insurance provider.
  • Tailored Coverage: Many insurers allow you to customize your gap insurance policy to align with your loan amount and car value.

By investing in gap insurance, you’re safeguarding yourself against future financial uncertainties, ensuring peace of mind throughout your car loan term.

Can You Get Gap Insurance Through Aaxel Insurance?

If you’re considering gap insurance for a financed car, partnering with a reliable insurance provider like Aaxel Insurance is a smart choice. Known for their customer-focused approach, Aaxel Insurance offers comprehensive gap insurance solutions tailored to meet individual needs.

Why Choose Aaxel Insurance?

  • Expert Guidance: Aaxel Insurance’s team of professionals helps you understand your coverage needs and explains the benefits of gap insurance in detail.
  • Affordable Options: They provide competitive rates, ensuring you get the best value for your coverage.
  • Customizable Policies: Whether you’re financing or leasing a car, Aaxel Insurance can design a policy that fits your unique requirements.

By choosing Aaxel Insurance, you’re not only getting gap insurance but also peace of mind knowing you’re working with a trusted provider.

How Much Does Gap Insurance Cost?

One of the most appealing aspects of gap insurance is its affordability. The cost of gap insurance varies based on several factors, including:

  • The car’s make and model
  • The loan amount
  • The term length of the loan
  • The insurer’s rates

On average, gap insurance costs between $20 and $40 per year when added to your auto insurance policy. Alternatively, if you purchase it through a dealership, it may cost $500 to $700 as a one-time payment. While dealership rates tend to be higher, the convenience of bundling gap insurance with your car purchase is a factor to consider.

Key Points to Consider Before Buying Gap Insurance

Before committing to gap insurance, it’s important to evaluate your circumstances. Here are some key considerations:

  • Understand Your Loan Terms: Determine how much you owe and how quickly your car’s value will depreciate.
  • Check Existing Coverage: Some auto insurance policies or lenders may already include gap coverage. Be sure to confirm before purchasing additional insurance.
  • Shop Around: Compare quotes from different insurers, including Aaxel Insurance, to ensure you’re getting the best deal.
  • Review Cancellation Policies: If you pay off your car loan early or trade in your vehicle, check whether you can cancel your gap insurance policy and receive a refund for unused coverage.

Final Thoughts

When financing a car, understanding your insurance needs is crucial. Gap insurance is an invaluable tool for protecting yourself financially in the event of a total loss. It bridges the gap between your car’s depreciated value and the remaining balance on your loan, saving you from potential financial strain.

Whether you’re buying a new car with a small down payment or opting for a long-term loan, gap insurance can provide the peace of mind you need. By working with a trusted provider like Aaxel Insurance, you can secure affordable and comprehensive gap insurance tailored to your unique needs.

In the end, gap insurance for a financed car isn’t just a luxury; it’s a smart investment that protects both your wallet and your peace of mind. Don’t leave your finances to chance—explore your gap insurance options today!

Disclaimer: All information in this site is provided "as is", with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information. Information is for awareness purpose only and you should speak to a licensed insurance broker for specific and relevanbt answers.

Aaxel Insurance
Aaxel Insurance
Aaxel Insurance deliver best-in-class insurance solutions backed by excellent customer service. We have locations across Ontario and Alberta and proudly serving thousands of customers.

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