Cover the Gap

Generally, when you buy a car the last thing you want to think about is, "What happens if my new car is declared a total loss?" To most people insurance is something that rates right up there with a root canal. Unfortunately, what many people fail to consider is that sometimes your car may not have enough equity it in to pay off your car loan. You see, the person that totals your car is not obligated to pay off your car loan; they are required to pay for the value of your car. That $50,000 car you bought last year may only be worth $35,000. If you owe the bank, $40,000, someone has to pay the difference to the bank. That someone that has to make up the difference is you. If you are leasing the car, a similar problem occurs. Under some leases a total loss is considered an early termination of the lease and can subject you to penalties. In the case of the lease, you will owe the finance company the remaining payments, the residual value of the car and any penalties such as early termination fees.

How do you protect against it? Simple, before you finalize the deal you make sure you have GAP insurance. GAP insurance covers the gap between what you owe the leasing company or bank and what the car is worth. On new cars it is available through your insurance company. On used cars, there are some insurance companies that offer GAP insurance. Otherwise you will have to buy it from a third party or the dealership. Regardless, the price is nominal, the value of peace of mind is priceless.