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What is Gap Insurance and How Does it Work?

If you’re in the market for a new car, you may have heard the term gap insurance come up. Gap insurance is a type of insurance you can take out on your car. It’s not part of your car loan, but it can significantly impact your finances if your car is totalled and you need to repay your loan in full. Read on to find out more about gap insurance. 

What is gap insurance?

Accidents can happen even to the best of drivers. Mostly, we are lucky to get away with a few digs and scratches. Sometimes, however, the unfortunate happens – and our cars are totalled, written off beyond repair. 

When this happens, your insurance company will compensate you for the cost of your car. That cost, however, is based on the car’s value at the time of your accident rather than the car’s original value. This means that if you took out a car loan to pay for your car, the compensation you receive may not be enough to pay off the outstanding amount on the loan. 

Gap insurance is the way to fill that gap – the insurance will pay out the difference between your compensation and the outstanding amount on the loan or lease agreement. It can be particularly helpful if you have a loan with a longer repayment term. Gap insurance is closely associated with cars but can also be taken out for motorcycles.  

How does gap insurance work?

Let’s look at an example of how gap insurance would work on a brand new $40,000 car. To purchase the car, you apply and are approved for a car loan of $40,000 from Handy Finance. After driving your car around for a few months, the car is unfortunately totalled. 

While driving the car, the value has depreciated to $35,000. This is the amount you’ll receive from the insurance company as compensation. You’ve paid off around $2000 from your car loan, which means you still owe $38,000. 

The gap between your compensation and what you still need to repay on your loan is $3,000. This sum is what your gap insurance would cover, so you are not paying the outstanding loan amount out of pocket. 

When should I take out gap insurance?

Whether or not you should take out gap insurance can depend on several factors. It’s common to take out gap insurance if: 

You plan on doing a lot of driving

One of the quickest ways to reduce a car’s value is by taking it on lots of long drives. If you know that you’re buying a car specifically for this purpose, getting gap insurance may be a good idea. 

You’ve accepted a loan with a longer repayment term

If you’ve secured a loan with a longer repayment term (around five or more years), your car will depreciate faster than you can repay. This makes gap insurance an attractive option.

You are taking out a lease on your car: 

Many lease contracts require you to take out gap insurance when signing the agreement. 

Peace of mind

No one wants to use their car insurance, but it provides peace of mind while driving. Accidents can happen! The same principle is applied to gap insurance – if you’re unlucky enough to total your car but still have a significant amount left on your loan, gap insurance can help you pay off your loan faster, so you can put your money towards financing a new car.

Gap insurance is available as an option when you purchase your car – it’s not part of your car loan and is not offered by Handy Finance. 

Do I need gap insurance?

You don’t need to take out gap insurance when buying a car – it isn’t mandatory. There are also plenty of other financial options available if you need to cover a gap between insurance payments for your totalled car and the outstanding balance on your car loan. One key option is refinancing the remaining balance of your loan. 

At Handy Finance, we offer various refinancing options on our car and personal loans. You can give our credit experts a call to discuss your options. Refinancing a loan gives you time to pay off the outstanding balance at your own pace, potentially with more favourable terms than the original loan had. 

What are the limitations of gap insurance? 

Additional costs

When it comes to owning a car, the costs can quickly pile up: driver’s insurance, petrol, regular maintenance, and car loan repayments. Gap insurance will be an additional cost. 

Decreasing benefits over time

Gap insurance is most valuable in the early stages of your loan. That gap will naturally narrow as you continue to repay your regular loan. You could end up paying for coverage that is no longer necessary. 

Purchasing gap insurance

Adding gap insurance to your coverage is a pretty straightforward process. Many dealerships will offer this when buying a car, or your existing car insurance company will be able to add this to your current policies. 

What’s more important is weighing up if gap insurance is for you. Look at the factors explored in this article. What kind of car are you purchasing? How will you be using your car? What is the estimated depreciation rate of the car you’ve chosen? What loan terms might you be offered? Answering these questions will help you decide if gap insurance suits you. 

Affordable car loans with Handy Finance

At Handy Finance, we offer fast and flexible secure car loans tailored to your financial situation. You can borrow between $2,001 and $75,000, with loan terms between one and seven years. Repay your loan in weekly, fortnightly or monthly instalments. All our car loans are secured and have a fixed interest rate. There is also a $0 early repayment fee – so if your financial situation changes, you can pay out your loan early without any extra costs. 

Our credit team is here to help you throughout the term of your loan and beyond. If you’re in a situation where your car is totalled, and you need to repay the outstanding balance on your loan, speak to our team. We can help you to refinance your car loan or discuss other options for paying off the outstanding sum. Give our team a call today.