What is Gap insurance?
When you buy a new car, the moment you take it off the property of the dealership, it starts to lose its value. This means, even if your car is brand new, its value has decreased greatly. So if your car is destroyed, the insurance you receive will be much lower than the original value of your car. Simply speaking, gap insurance is the difference between the value of the car and what you owe on your car. The purpose of a gap protection therefore is to cover this difference between auto loan and auto value. If you have gap insurance, your insurer pays the difference and not you. This might sound like an attractive policy but don’t rush into it because not everyone needs it.
Why you might need gap insurance
Not everyone needs gap insurance and not everyone should get it. But you should know if having it will be useful for you. The following reasons are why gap insurance might be useful for you:
If you owe more than the value of your car, you risk being in negative equity. This situation can arise if:
- The down payment of your financial arrangement was too small, such as 20%
- The interest is too high
- Your kind of car is loses value very quickly
- the debt payment is going too slowly, or
- your financial deal is such that you are going to be left with a huge sum to pay at the end
You will not be able to replace your car
If your new car is depreciating fast in value, you are concerned that you will not be able to afford a replacement later
Contract hire deal
If you’re financial deal involves a long-term contract hire arrangement, and your vehicle is stolen or written off, you are at a risk of owing the contract hire company more than the amount that your insurance agency is willing to pay out.
For a Volkswagen vehicle, or for a vehicle of any other company, you will need to do your research and see if you really do need to buy gap coverage. For instance, Volkswagen is a reliable company that and its cars do not lose value fast. In that case, the risk of negative equity is not high and you don’t really need gap insurance. However, as explained earlier, if your purchase of the Volkswagen vehicle has left you with too much debt repayment then gap insurance is something you might want to consider. Another important point to consider is your finance agreement. If it already covers the difference between the official value of your car and how much you paid, then you don’t need gap insurance. The need for gap insurance differs from car to car and owner to owner. Therefore, it is important to do your research and discuss your coverage with your insurer before you purchase gap insurance.