When you purchase a new car, you may find yourself owing more on your loan than the car is worth. This can become an issue if your vehicle is totaled in an accident.
Standard auto insurance typically covers the current market value of your car, which may be less than your outstanding loan balance.
Gap insurance is an additional type of coverage that some drivers choose to purchase. While not necessary for everyone, it can provide extra financial protection in certain situations.
This article will explore the key differences between gap insurance and auto insurance, so you can understand how these options work together to protect your vehicle.
What’s Car Insurance All About?
Car insurance is your basic protection on the road. It’s what most drivers have and is required by law in Louisiana and many other states.
At its core, car insurance helps cover costs if you’re in an accident or if your car gets damaged. It’s a safety net for you, your vehicle, and others on the road. There are a few common types of car insurance coverage in Louisiana:
- Liability: This covers damage you cause to others. If you hit someone’s car or property, liability pays for their repairs and medical bills.
- Collision: This covers damage to your own car in an accident, regardless of who’s at fault.
- Comprehensive: This protects against events out of control, such as damage from things like falling trees or hail storms, which can be common in Louisiana.
If your car is totaled (damaged beyond repair), standard insurance typically pays out the current market value of your car. This is where things can get tricky for Louisiana drivers.
If you owe more on your car loan than the car’s worth, you might be left with a gap to cover out of pocket. This is an important point when comparing it to gap insurance, which we’ll cover next.
Read more: How Does Car Insurance Work When You Get into An Accident?
Gap Insurance
Gap insurance is an extra layer of protection on top of your regular car insurance. It’s designed to cover the “gap” between what you owe on your car and what it’s worth if it’s totaled or stolen.
Let’s say you bought a new car for $30,000. A year later, it’s totaled in an accident. Your regular car insurance might pay out $25,000 (the current value of the car), but you still owe $28,000 on your loan. Gap insurance would cover that $3,000 difference.
Gap insurance kicks in when your car is declared a total loss, stolen, and not recovered, and you owe more on your car loan than the car’s current value.
When Gap Insurance Might Be Useful
Not everyone needs gap insurance, but in some situations, it can be a real financial lifesaver. Here’s when you might want to consider it:
New Car Purchases
That new car smell comes with a price – rapid depreciation. Most cars lose 20-30% of their value in the first year. If you totaled your new car in that time, gap insurance could save you from owing thousands on a car you can’t drive anymore.
Long-term Auto Loans
Stretching out your loan over 5, 6, or 7 years means lower monthly payments, but it also means you build equity in your car more slowly. Gap insurance can protect you if you owe more than your car is worth for a longer period.
Leased Vehicles
Leasing often requires less money upfront, but that means you have less equity in the car. If it’s totaled or stolen, gap insurance can cover the difference between what you owe on the lease and what the insurance company pays out.
Fast-Depreciating Cars
Some cars lose value faster than others. If you’ve got a car that depreciates quickly, gap insurance can protect you from being underwater on your loan if something happens to your vehicle.
Understanding these coverage options helps ensure you’re properly protected while driving. The right insurance provides peace of mind behind the wheel.
Read more: Things to Know Before Buying Car Insurance for the First Time
As an insurance agency serving Baton Rouge, Lafayette, Franklin, Abbeville, and Lutcher, we’re here to help you navigate your options. Our team at TSL Insurance Group can assist in finding coverage that fits your needs.
We offer free consultations at all our offices. Contact our insurance agency in Baton Rouge, Lafayette, Franklin, Abbeville, or Lutcher today. Let’s find the right insurance solution for you
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