Before knowing why do I need GAP auto insurance, it is important to to understand What is GAP insurance , what is GAP in auto insurance and how is GAP calculated at the time of insurance claim. Gap insurance is actually a protection for your car which covers the difference between the amount you owe on your car and the how much your car is worth. When you expect to owe more than what the car is worth for a significant time period. This is more gap protection which many people may not need.
To understand GAP insurance let us consider this situation. Your standard auto insurance will protect you from the losses on repairs to your car arising from an accident. This holds well when your car is stolen and damaged by vandalism by your appropriate coverage. When your car is totaled after an accident and the actual value of your leased car is lower than what you owe on your car loan, you make a claim with your auto insurance company. The insurance company will only pay you the amount that the car was worth before the accident. You will end up paying the GAP amount or the remaining amount of the loan on your own.
GAP protection is meant to cover the difference between the auto loan and the auto value in the event of the car meeting with an accident. To know how to use the GAP insurance coverage you need to know how the GAP occurs.
So GAP insurance is for people who expect to be “upside down” meaning you owe more than the vehicle’s worth. The GAP happens when you make a very low down payment, or the interest rate on your car loan is high, when the car depreciates fast or when you have clubbed other costs to your car loan payments. All that would push up the amount that you owe and if your car is totaled or stolen, your outstanding loan amount will definitely be more than the actual value of the car. So it is clear that you do not need GAP insurance when you have made a good amount of down payment on the car loan. Make sure that you have arranged the monthly payments and that you will not be “upside down” on the car for a significant period of time.
When a car is leased, the loan providers make it part of the contract and GAP insurance is insisted on. This is because the difference between the amount you have paid and the value of your car will be certainly huge and GAP insurance takes care of the difference in the two values and therefore critical for leasing of vehicles.
When the car value is less than what you own on it makes it a negative equity on the car and therefore it is a factor of risk and standard auto insurance will not cover it. Hence the need for GAP insurance.