When you buy a brand new car and subscribe to a comprehensive insurance plan, you might have one more step to be completely safe from significant financial loss when you total your car. Getting a car insurance pay off loan is the final step to protect you fully.

What is a Car Insurance pay-off loan?

A car insurance pay off loan is an optional but highly recommended purchase after buying a new car. The common name for this loan is gap insurance. Your car insurance pay off loan can help you finish your car loan payment if your car gets stolen or you total it, and its depreciated value is less than the amount you still owe for the car. Another name for gap insurance is lease gap coverage. You can buy gap insurance only if you own the original loan or lease a new vehicle.

How does a Car Insurance Pay Off Loan Work?

Many people who buy new cars have no idea how quickly the vehicles lose value when they take them home. Most new cars lose as much as 30.5% of their value during the first year. When you have collision and comprehensive insurance, you can use it to replace covered losses on the vehicle. These insurance packages have limits and use your car‘s actual value.

The problem is that after your car reaches about two years, its value will have lost a lot of its book value even though it is mechanically pristine. Moreover, if you total the car or it gets stolen, the insurance company will pay you thousands of dollars less than your loan balance. Your car insurance pay off loan kicks in and pays you the difference between the money you get from the insurance company and what you owe from your original loan or lease.

For instance, let’s say your car gets totaled while you still owe $10,000 on its loan. Your insurance company could reimburse you the current value of the vehicle. If its current value is $4,000, you’d be losing $6,000 unless you have gap insurance. As the name suggests, gap insurance pays you for this ‘gap.’

Do you need a Car Insurance Pay Off Loan if you have Comprehensive Coverage?

Yes. You will still need a car insurance pay off loan, especially if you bought your car on loan or lease. Dealerships usually offer you gap insurance if you lease your vehicle from them. Within 30 days of renting or buying your new car on loan, you can apply for gap insurance from your insurance company.

Pre-conditions for Buying Gap Insurance

When buying gap insurance, the most crucial factor is how much money you still owe on your car loan and the car’s current value. The following are cases where gap insurance can save you a lot of money.