Gap Insurance Information

• Gap insurance is available for purchase through dealerships, lenders or your insurance company. Some states cap the cost for gap insurance, in which case you can expect to pay less than $100 for its purchase. Otherwise, you may pay in excess of $500. If you purchase the policy from a lender or dealer, you can add the cost to your loan balance. You do not receive the cost of gap insurance back if you do not use it.
  
  

Total Loss Payoff

• Most lenders require a full coverage insurance policy for a car until its loan is paid off. Your insurance company pays for the car's market value if it becomes a total loss, without regard to your loan balance. If your vehicle's value is more than your loan balance, you may keep the profit. If not, you are responsible for paying the remaining loan balance, unless you have gap insurance. Gap insurance only covers your excess loan balance; it does not replace your vehicle.
  
  

Paying off Your Loan

• Without gap insurance, your loan balance remains as an open account on your credit report until you pay if off. An open car loan may be unfavorable to possible lenders if you're trying to replace your vehicle through another loan. A second car loan is possible, depending on your credit history and income, but you'd have to make two car payments until the old loan is satisfied. Because gap insurance pays off the old loan, creditors view the loan balance as paid in full, which allows you to get financing for another vehicle with less difficulty.
  
  

Replacing Your Car

• If your insurance payout and gap insurance cover your loan balance, you'll have to start the car shopping process all over again, which includes applying for a new loan. An insurance company may claim that it can replace your vehicle, but it cannot replace it while you have a loan. Bank lending guidelines are separate from insurance replacement offers. Loans are based on your credit and vehicle value, so you can't change your vehicle in the middle of your loan. Expect to apply for a new loan if you want to replace your totaled vehicle.