We have all heard the saying that cars begin to depreciate right when they leave the lot. Not only do we accept this as true, but we also accept five years (plus or minus) of payments in order to keep the vehicle we worked so hard to find. However, are you covered if your vehicle is totaled not long after you buy it?

Comprehending the Gap

Your auto insurance policy pays the actual cash value of the vehicle if it is totaled in an accident. ACV equals the cost to replace the car minus depreciation. The million-dollar question in this case is whether the ACV is identical to what you actually still owe the lenders.

In many situations, the answer is probably not. Consider a car that has two payment years totaling $20,000 remaining on a loan. Thanks to depreciation, at the time of the loss, the car is worth just $12,000. Since the policy pays the actual cash value at the time of the accident, a gap of $8,000 becomes apparent, and the value of this insurance is suddenly made much more clear.

Payments Continue, With Or Without The Vehicle

Under these circumstances, a gap of $8,000 was generated because of the total loss of the car. Regrettably, the loss does not mean that the loan also ends, and, in fact, the financing company will continue to call for payments on the loan until it is satisfied, in spite of whether or not you still are able to drive the car.

Defining The Gap

Lenders and car insurance carriers deal with this issue by the way of gap insurance. This coverage is intended to bridge the gap between the amount remaining on the loan and the vehicle’s ACV after a complete loss.

Gap insurance becomes even more critical in cases where there is a long time (or a lot of payments) remaining in order for the loan to be satisfied in full.

It can be very simple and convenient to shop for gap insurance, so request your free San Francisco car insurance quote now, especially if you are paying off a vehicle loan right now.