Gap Insurance or New Car Replacement Coverage — Which is Right For You?
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Last updated 03/18/2024 by
Marcie GeffnerAre you debating between gap insurance or new car replacement coverage? These are some things to consider.
Suppose you buy a brand new car that becomes totaled just a few weeks or months later due to a car accident. Could you afford to pay off the balance on your car loan and buy a replacement car?
This is an important question to answer because you’d still be responsible for the full amount of your auto loan, regardless of what condition your car is in.
This is where auto insurance comes into play. It could help you cover the difference between the cash value of your car and the balance you owe on your loan.
But is it worth getting gap insurance on a new car? Or is new car replacement coverage a better idea? Figure out which option is best for you before you drive off the lot with your new car.
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What is vehicle gap insurance?
This type of insurance coverage pays you the difference between the actual cash value you’d get from your insurer for your wrecked car and the balance you owe on your car loan.
Your car loan doesn’t disappear just because you were involved in a car accident. You’ll still have to pay that loan off even if your car was wiped out.
You might have to eat the deductible on your insurance policy as well. That could make it difficult or impossible for you to qualify for another loan to purchase a replacement vehicle.
Instead, you’d be limited to spending no more than the cash value you received for your wrecked car, plus any other cash you have available to buy a replacement car.
Gap insurance and new cars
If you buy a brand new car and you don’t put much money down, a gap between the car’s value and your car loan balance is a near certainty. The moment you drive off the dealer’s lot it loses about 10% of its value. After the first five years, the average car loses 60% of its value.
That’s because a new car becomes a used one as soon as you drive it off the dealer’s lot. A used car is usually worth less than a new one of the same make, model, and year.
Gap insurance is so important in this situation that many car loan companies will require you to have it if you’re unable to put a certain percentage of the purchase price down front”
Gap insurance is so important in this situation that “many car loan companies will require you to have it if you’re unable to put a certain percentage of the purchase price down u front,” says Brad Goldsberry, agency producer at The Nate Bingel Agency – Farmers Insurance in Northglenn, Colo.
Over time, the gap will slowly diminish as you pay off your car loan. Eventually, you’ll no longer need the extra insurance.
What is new car replacement coverage?
Another option is new car replacement coverage.
This (coverage) makes it, so you don’t have a gap in your insurance and the finance company would be satisfied”
Rather than getting only the cash value of your wrecked car, this type of coverage gives you the full value of your car – whatever it takes for you to purchase that same car again, brand new
Your deductible and other policy limits may apply.
“This (coverage) makes it, so you don’t have a gap in your insurance and the finance company would be satisfied,” Goldsberry says.
Should you get gap replacement insurance?
Gap insurance is not for everyone. It can be a waste of money or a financial lifesaver. For instance, if you own your car outright, you don’t need gap insurance. You’re a good candidate for a gap insurance if you answer yes to the following questions:
- Do you lease a vehicle?
- Does your auto loan have a term of 60 months or more?
- Did you put a downpayment of 20% or less?
- Have you rolled a negative equity from a previous car loan?
- Do you drive more than the average 15k miles a year?
- Have you bought a car with a high depreciation rate?
How much car insurance you need is a personal decision that Goldsberry says “would most likely come down to price.”
New car replacement is a feature that some insurance companies include with their normal auto insurance policy, while others do not,” he says.
“I would recommend shopping around for both gap insurance and a policy that would replace your car at its replacement cost, and see which would satisfy your needs at the most reasonable price.”
They’re called car “accidents” for a reason – they happen unexpectedly, which is why you want to make sure you’re covered before it happens.
FAQ on Gap Insurance & New Car Replacement Coverage
What is gap insurance and what does it cover?
Gap insurance is an optional, add-on car insurance coverage that can help certain drivers cover the “gap” between the amount they owe on their car and the car’s actual cash value (ACV) in the event of an accident.
Do you need gap insurance if you have full coverage?
If you’ve paid off enough of your car loan that you owe less than it’s worth, you don’t need gap coverage. In fact, if you’ve got comprehensive and collision coverage, you’ve got all the insurance you need to pay off your loan.
What is new car replacement coverage?
New car replacement is an add-on to insurance. This means it enhances standard collision coverage. It will pay out more in the case of a totaled vehicle. Collision coverage helps pay for repair or replacement costs if your car crashes into an object or another car.
Is new car replacement the same as gap insurance?
(They are called endorsements.) You can add both New Car Replacement Coverage and GAP Coverage to your policy or, you can add New Car Replacement Coverage only to your policy. You can’t purchase GAP Insurance Coverage without buying New Car Replacement Insurance.
How does new car replacement insurance work?
Collision coverage helps pay for repair or replacement costs if your car crashes into an object or another car. Under collision coverage, damage to your car is covered up to the total value of the car, minus the deductible. This coverage is recommended if you’re leasing a vehicle or you’re paying off a vehicle loan.
To find the best auto insurance for you, review and compare top companies side-by-side today.
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Marcie Geffner is an award-winning freelance reporter, editor, writer and book critic. Her work has been featured online and in print by The Washington Post, Los Angeles Times, Chicago Sun-Times, Urban Land, Business Start-Ups and Fox Business Network Online, among many other newspapers, magazines, and websites. With a bachelor’s degree in English from UCLA and MBA from Pepperdine University in Malibu, Geffner has impressive credentials in both story-telling and business management. A second-generation native of Los Angeles, Geffner now lives in Ventura, California, a surf city northwest of her hometown.
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