Financing a vehicle using a payment plan is a common occurrence among new car buyers in Texas. If you get into a car accident in a vehicle that you are still paying off, however, or if the car gets stolen, you are still responsible for paying your outstanding loan balance. In addition, you may be responsible for paying to purchase or rent another car if the first is damaged or totaled. Gap insurance can help you avoid paying out of pocket for the difference between the value of your loan and the actual cash value of your car.
What Is Gap Insurance?
Gap insurance gets its name from the acronym Guaranteed Asset Protection (GAP). It is an optional endorsement that you can add to a car insurance policy in Texas. Gap insurance will pay the difference between your outstanding loan amount and the depreciated actual cash value of your vehicle. In other words, it will pay the “gap” between the amount that you still owe on a vehicle and its fair market value.
What Does Gap Insurance Cover?
If you get into a car accident in a new car that you are still financing, the insurance company responsible for paying for vehicle damage will only pay for its actual pre-crash value. This most likely won’t match what you originally paid for the car, even if you only drove it off the lot a few days before the crash. This can mean a gap in how much the insurance company pays versus how much you still owe on the vehicle loan. Gap insurance makes up this difference.
If you purchased a car using a loan for $30,000, for example, and a car insurance company only offers $27,000 in property damage liability insurance after a car accident, you will be on the hook for the other $3,000. If you have gap insurance, it will pay the $3,000. It is important to note that gap insurance does not pay for any repairs to the vehicle or medical bills. It also does not cover a new vehicle sale or trade off – even if the amount that you financed is higher than the actual value of the vehicle.
Should You Purchase Gap Insurance?
Gap insurance is an optional add-on in most states. In some, however, auto dealerships are required to offer this type of insurance during the sale of a vehicle. Whether or not to purchase gap insurance will depend on your financial situation, the value of the vehicle and your financing agreement with a lender. Note that gap insurance is typically only available for vehicles that are brand new or less than a year old.
Do some math to find out if gap insurance is worth the investment in your situation. Research how much your type of vehicle typically depreciates when you drive it off the lot and in the first two years. Compare what the actual cash value of your vehicle will be in the future to the value of your vehicle loan. If the difference in value is more than you can afford out of pocket, gap insurance is worth considering. It is also a good idea to purchase gap insurance if you have a vehicle that is a popular model for auto theft.
How to Use Gap Insurance
If you purchase gap insurance and your vehicle does get damaged, totaled or stolen, the first step to getting coverage is to determine fault. Under Texas’s fault-based insurance law, you will file a claim with the insurer of the at-fault driver. The other driver’s property damage liability insurance will pay the actual pre-crash value of your vehicle, up to the policy’s maximum (the minimum required amount in Texas is $25,000).
If you caused the crash, you must have collision or comprehensive coverage to file a claim with your own insurer for property repairs. Either way, once the claim is underway, your own insurance company will apply your gap coverage, as needed. This will pay for the difference between what you receive from an insurance company and what you still owe on your car loan. If you need assistance negotiating a settlement involving gap insurance with an insurance company, consult with an attorney in Dallas.