For Gap insurance, as the name suggests, you need to have a gap. But what gap are we talking about here? Well, the gap here means the gap between what an individual owns and the vehicle's value. Anyone who satisfies this condition is suitable for Gap insurance. This includes the following individuals:
Who take vehicle loan for 5+ years.
Who put either 0 or a tiny amount of money down on a vehicle loan
Who purchase a vehicle that depreciates rapidly.
Who lack the financial capability to cover the gap between vehicle's value and loan's value.
In the current market situation, people pay significantly above the vehicle's true value. This is because; the value of a vehicle can depreciate rapidly in a short time span, for example, 1 year. Just in 1 year, your vehicle's value can drop significantly, so much so that it becomes lesser than the loan.
As a consequence of this rapid value depreciation, the need for Gap insurance becomes important. This is for buyers who lack the financial prowess to pay off balance in case an unfortunate occasion arises, for example, theft or damage.
The vehicle price in the current market scenario can be understood with a bubble metaphor. This is a bubble that can rupture at any time. Indeed this happens soon enough, in a year or so, when the vehicle value depreciates suddenly and heavily. Vehicle owners must think over this when considering Gap insurance. It can save them the pain of an ugly reality later on.
There are some situations when Gap insurance is not worth taking. You don't really need Gap insurance if you are one of the following:
If you are making payment for your car. This means you will be, most probably, covered with collision coverage. Actually, collision coverage is a requirement according to the loan agreement terms.
If a down payment was made by you that was a minimum of 20% on the concerned vehicle.
If it is possible for you to pay off the loan within 5 years, you need not worry about Gap insurance.
If your vehicle is of a high profile brand, such that it can historically maintain its value. For example, the classic Aston Martin.
If the vehicle's value is more than the loan balance, the need for Gap insurance is totally lifted. To find out the accurate value of a vehicle, refer to the guide of the National Automobile Dealers Association (NADA).
