Gap Insurance: Comprehensive Coverage?

Gap insurance is an optional form of auto insurance that covers the difference between the depreciated value of a car and the loan amount owed if the car is involved in an accident. It is not the same as comprehensive insurance, which covers damage to your vehicle that is not related to a vehicle accident, such as theft, vandalism, or damage from natural events. Comprehensive insurance is typically required by lenders until the loan is fully paid off, whereas gap insurance is optional and can be cancelled once the loan balance is lower than the car's value.

Gap insurance covers the difference between the depreciated value of a car and the loan amount owed if it's totalled or stolen

Gap insurance, or Guaranteed Auto Protection, is an optional insurance product that covers the difference between the depreciated value of a car and the loan amount still owed if the car is totalled or stolen. This type of insurance is intended for drivers who owe more on their car than the vehicle is worth.

When you buy a new car, it starts to depreciate in value as soon as it leaves the car lot. Most cars lose 20% of their value within a year, and the average automobile loses 10% of its value in the first month after purchase. This means that in the early years of ownership, the amount of the loan may exceed the market value of the vehicle. Standard auto insurance policies only cover the depreciated value of a car, so in the event of an accident, theft, or total loss, gap insurance can be invaluable.

For example, if you have a $25,200 loan on a new car with a sticker price of $28,000, and the car is totalled in an accident after a year, your insurance company will calculate the current value of the vehicle. If your car has depreciated by 20%, its value is now $22,400. Your standard insurance will cover this amount, but gap insurance will cover the remaining $2,800 you owe on the loan.

Gap insurance is particularly useful for people who have not made a down payment on their car or who have a long payoff period, as they may owe more than the car's current value. It is also beneficial for those who have purchased a vehicle that depreciates faster than average, such as luxury cars or electric vehicles.

You can purchase gap insurance from car insurance companies, banks, or credit unions, or it may be offered to you by your car dealer when you purchase the vehicle. It is important to compare prices and coverage before buying, as the cost of gap insurance can vary. Adding gap coverage to a car insurance policy typically increases the premium by around $40 to $60 per year, but buying it from a dealership can cost hundreds of dollars more.

It is needed when the car is financed without a down payment

When a car is financed without a down payment, gap insurance becomes a crucial safeguard against potential financial losses. Here's why it's needed in such cases:

Protecting Against Negative Equity

When you finance a car without a down payment, you're more likely to owe more on the loan than the car's actual value. This situation, known as negative equity or being "upside down" on your loan, occurs because cars depreciate quickly as soon as they're driven off the lot. A down payment helps reduce this risk by lowering the amount you borrow. Without a down payment, gap insurance becomes essential to protect you from this disparity between the loan balance and the car's value.

Coverage in Case of Total Loss

If your financed car is in an accident, stolen, or declared a total loss, standard car insurance will only pay up to the car's current value, which may be less than the outstanding loan balance. Gap insurance covers this gap by reimbursing you for the difference, ensuring you're not left with a significant financial burden. This protection is especially important when you haven't made a down payment because the entire loan amount is at risk of exceeding the car's value.

Peace of Mind for Long-Term Loans

Financing a car without a down payment often leads to larger loan amounts and longer payoff periods. In such cases, gap insurance provides peace of mind by safeguarding you against the risk of owing more than the car's value for an extended period. It ensures that if an accident occurs during the early years of your loan, when the risk of negative equity is highest, you won't have to pay out of pocket to cover the loan balance.

Lender Requirements

In some cases, lenders may require gap insurance when a car is financed without a down payment. This requirement is based on the understanding that the borrower is more likely to be upside down on the loan and needs protection against potential losses. By including gap insurance, lenders can mitigate their own risks while also ensuring borrowers aren't left with unexpected expenses.

Avoiding High Interest Costs

When you finance a car without a down payment, you may end up paying more in interest over the life of the loan. Gap insurance helps alleviate this burden by reducing the likelihood of negative equity. Without gap insurance, you could be stuck with a car loan that exceeds the car's value, resulting in higher overall costs, including interest expenses. Gap insurance allows you to minimise these long-term interest costs.

It is optional and not needed if the car is not financed

Gap insurance is an optional, additional coverage that can be purchased to supplement a full-coverage insurance policy. It is designed to cover the difference between the compensation received after a total loss of a vehicle and the amount still owed on the car loan. This type of insurance is particularly relevant for drivers who have financed their vehicles and owe more than the vehicle is currently worth. In such cases, gap insurance can provide financial protection by covering the remaining loan amount after a total loss.

However, if the car is not financed, gap insurance is not necessary. This is because gap insurance specifically addresses the gap between the vehicle's value and the outstanding loan balance. Without a loan, there is no gap to worry about, and standard comprehensive insurance should cover any damage to the vehicle. Comprehensive insurance, which is optional but often required by lenders, covers damage caused by non-collision events such as theft, vandalism, and natural disasters. It is designed to protect against unforeseen events and provide peace of mind to vehicle owners.

When considering whether to purchase gap insurance, it is essential to evaluate your financial situation and the value of your car. If you have a large car loan or a vehicle that depreciates quickly, gap insurance can be a wise investment. On the other hand, if you have made a substantial down payment or are paying off your loan within a short period, you may not need gap insurance. Additionally, if your vehicle is not financed and you own it outright, comprehensive insurance becomes a matter of personal preference and financial circumstances.

In summary, gap insurance is optional and may not be needed if the car is not financed. Comprehensive insurance, while also optional in most cases, is generally recommended to protect against unexpected damages to your vehicle. The decision to purchase gap insurance should be based on a careful assessment of your loan balance, car value, and the potential financial impact of a total loss.

It is also known as guaranteed auto protection

Guaranteed Auto Protection (GAP) insurance is an optional product that covers the difference between the amount owed on an auto loan and the amount the insurance company pays out if the car is stolen or totalled. This type of insurance is intended for those who have financed a vehicle with little or no money down and a long payoff period, as they may owe more than the car's current value. GAP insurance covers the "gap" between the depreciated value of the car and the loan amount owed.

GAP insurance is not necessary for those who have not financed their vehicle. However, for those who have, it can be a good idea, especially if the car is expected to depreciate quickly. Cars can depreciate rapidly, with the average automobile losing 10% of its value in the first month of ownership and 20% within the first year. If the down payment made on the car is small, the amount owed can quickly exceed the car's value.

GAP insurance is typically offered by car dealers when purchasing or leasing a vehicle. However, it is also available from auto insurance companies, and it is often cheaper to add it to an existing policy than to buy it from a dealer. GAP insurance can be added to a comprehensive auto insurance policy for as little as $20 a year, according to the Insurance Information Institute. The cost will vary depending on factors such as the state, the age of the driver, their driving record, and the vehicle.

GAP insurance is not always necessary. If the amount owed on the vehicle is less than or only slightly more than its value, there is no need for GAP insurance. Additionally, once the loan balance is lower than the book value of the vehicle, GAP insurance can be cancelled.

It is required for leased cars

Gap insurance is often required for leased cars due to their quick depreciation. This type of insurance is an extra layer of financial security when a car depreciates and is worth less than the amount owed on the vehicle. It covers the difference between the vehicle's actual cash value (ACV) and what you still owe on the lease.

Leased cars depreciate quickly, and gap insurance can be beneficial if you made a low down payment, have a long lease term, or are leasing a luxury car. Some lessors automatically add gap insurance as part of your loan agreement or payments. It is important to check your lease agreement to see if gap insurance is required.

Even if gap insurance is not required, it can still be a worthwhile addition to your insurance policy. If your leased car is stolen or totaled, gap insurance can save you thousands by covering the difference between the ACV and the remaining lease payments.

It is important to note that gap insurance is only available if you are the original leaseholder on a new vehicle. Additionally, you will need to have collision and comprehensive coverage in place before adding gap insurance.

In summary, gap insurance is often required for leased cars and can provide valuable financial protection in the event of theft or total loss of the vehicle.

Frequently asked questions