Gap contract is a term that refers to a type of insurance contract that offers coverage for the difference in cost between an insured asset`s actual cash value and the outstanding balance of a loan or a lease. This type of coverage is primarily used for vehicles, although it can also apply to other assets.
For instance, when a person buys a car, they usually take out a loan to pay for it. However, if the car gets damaged or stolen, the insurance payout may not be sufficient to cover the loan balance. In such a scenario, the buyer would still be liable for the remaining balance, even though they no longer have the car. This is where gap insurance comes in handy.
Gap insurance would cover the difference between the insurance payout and the outstanding loan balance, effectively protecting the buyer from having to pay out of pocket for the remaining balance. This type of coverage is particularly helpful in cases where the loan amount is high, or the car is new and has a high depreciation rate.
Gap insurance is available from various insurance companies, and the cost varies depending on the make and model of the car, the loan amount, and the buyer`s credit score. Typically, the cost of gap insurance is a one-time premium that is paid upfront or added to the loan amount.
It is crucial to note that gap insurance is not mandatory, and car buyers are not legally obligated to purchase it. However, it is essential to assess the risks involved and weigh the benefits of having this type of coverage. In some cases, car dealerships may offer gap insurance as part of their financing package, but it is vital to compare prices and coverage options from other insurers to make an informed decision.
In conclusion, gap insurance is a type of contract that provides coverage for the difference between an insured asset`s actual cash value and the outstanding balance of a loan or lease. This type of coverage is particularly useful for new cars or high loan amounts and can protect buyers from having to pay out of pocket for the remaining balance. While it is not mandatory, it is crucial to assess the risks involved and compare prices and coverage options to make an informed decision.