Gap Insurance Vs. Conditional Gap Waivers

GAP is an acronym for guaranteed asset protection. Both GAP waivers and GAP insurance are additional coverage you can apply to your auto loan that has the potential to save you thousands of dollars in the event of an accident. However, they are not the same thing. A GAP waiver is a debt cancellation agreement that absolve you from paying the difference between what you owe on the vehicle and what it's worth if the vehicle is declared a total loss. It is offered by your creditor and is not actually insurance. GAP insurance, on the other hand, is a standalone insurance product that can be purchased at any time from a separate licensed provider and is regulated by the state.

How does a conditional gap waiver work?

A conditional gap waiver, also known as a gap addendum, is a supplement that you can add to your auto loan or lease. It is a debt cancellation agreement that relieves you from paying the difference between what you owe on a vehicle and its actual cash value (ACV) if it is declared a total loss. This can occur when a vehicle is damaged in an accident, stolen, or suffers a total loss due to other unanticipated events.

When you purchase a vehicle, you agree to be responsible for covering its initial cost until it is paid off. In the event of an accident or theft, your car insurance is supposed to cover what is left to pay on your loan. However, you will only receive the equivalent of the car's book value or ACV, which takes into account factors such as the car's age, depreciation, and mileage. As a result, your auto insurance company may not pay the full balance of your loan, leaving you responsible for the remaining amount.

This is where a conditional gap waiver comes into play. It covers the gap between what your insurance pays out and the remaining balance on your loan, up to a specified percentage of your car's loan-to-value (LTV) and a specified amount. For example, you may have coverage up to 150% of your car's LTV, up to $50,000. The LTV and maximum loan balance covered will vary by provider.

It is important to note that a gap waiver is not the same as gap insurance. While both function similarly, a gap waiver is attained through your lender or lease company and is typically paid for upfront when taking out a loan. On the other hand, gap insurance is a standalone product that can be purchased at any time and functions similarly to car insurance, with monthly payments.

When is a gap waiver required?

A GAP waiver, or Guaranteed Asset Protection waiver, is a debt cancellation agreement that covers the gaps left behind by insurance payouts when your car is stolen or totaled. It is required when you want to protect yourself against costly, unexpected expenses.

When you buy a car, whether new or used, you are responsible for covering the initial cost of the car until it is paid off. If your car is damaged in an accident and can't be repaired, or is stolen, your car insurance is supposed to kick in and cover what's left to pay on your loan. However, you will only receive the equivalent of the car's book value or actual cash value (ACV), which is calculated based on the car's age, depreciation, mileage, and other factors. This means that your auto insurance company is not guaranteed to pay out the full balance of your loan.

The responsibility for making up the difference falls on you. This is where a GAP waiver comes in. A GAP waiver waives the remaining loan balance up to a specified percentage of your car's loan-to-value (LTV) and a specified amount. The LTV and maximum loan balance vary by provider. For example, you may have coverage up to 150% of your car's LTV, up to $50,000.

A GAP waiver is required when you want to ensure that you are not left with a hefty and unexpected expense after a crash. Situations in which you should purchase GAP coverage include:

• When you put little to no money down: Without making a significant down payment, the depreciation that occurs as soon as you drive the car off the lot can leave you exposed to out-of-pocket costs in the event your car is stolen or totaled.
• When you have an upside-down loan: This refers to when your loan balance exceeds the value of your car, creating a high loan-to-value ratio. If you total a car financed with an upside-down loan, you would owe more to the lender than your insurance would pay out.
• When your car depreciates quickly: Some vehicles depreciate faster than others, particularly luxury models. If your car depreciates quickly, you are more likely to owe more on your loan than its actual cash value.
• When your loan has a high-interest rate: With a high-interest loan, it will take longer for you to build up equity. Without sufficient equity, you will still owe more on your loan than would be paid out based on your car's ACV.
• When your loan term is at least 48 months: A long-term loan leaves you in a similar situation to having a high-interest loan. It will take longer for you to build up equity, and you may still owe more on your loan than the ACV payout.

In addition, some lenders may require you to have some form of GAP coverage if you plan on leasing a vehicle. This may be included as part of the lease agreement, or a similar product called loan/lease coverage may be offered.

How is a gap waiver different from gap insurance?

While both gap waivers and gap insurance policies are designed to protect consumers from financial losses in the event of a vehicle being stolen or written off, there are some key differences between the two.

Firstly, a gap waiver is not considered to be an insurance product and is therefore not regulated as such. A gap waiver is a debt cancellation agreement or addendum that can be added to an auto loan or lease. It is offered by a lender or leasing company and is typically built into the loan and loan payment. The cost of a gap waiver can be as little as $14 per month or 45 cents per day. On the other hand, gap insurance is a standalone insurance product that must be purchased privately from a separate licensed provider and may carry a higher price tag.

Secondly, gap waivers are only available at the time of taking out a new loan or refinancing an existing one. They are sold by creditors or finance companies and are paid for upfront when taking out a loan or refinancing. The cost of a waiver is commonly rolled into the auto loan. In contrast, gap insurance can be purchased at any time and is paid for monthly.

Thirdly, gap waivers cover the entire balance between what is owed on a loan and the value of the car, whereas gap insurance on a personal auto insurance policy may be limited to a certain percentage of the vehicle's value.

Finally, gap waivers are not subjected to insurance regulations as there is no insurance company involved. However, gap insurance is regulated by the state and consumers can expect their insurance premium to increase following a gap insurance claim.

Where can you get a gap waiver?

A GAP waiver is an agreement that can be added to your auto loan or lease. It is a debt cancellation agreement that absolvees you from paying the difference between what you owe on the vehicle and what it is worth if the vehicle is declared a total loss.

GAP waivers are offered and sold by your creditor or finance company when getting an auto loan or refinancing. They are not mandatory, but they can be purchased upfront when you take out a loan or refinance, and the cost of a waiver is commonly rolled into your auto loan.

If your lender or lease company does not require a gap waiver, you may be able to purchase gap coverage through your auto insurer instead of the car dealership or your lender/lease company. This may save you money.

In the US, GAP waivers can be purchased through lenders such as iLendingDIRECT and Progressive.

Who needs a gap waiver?

A Guaranteed Asset Protection (GAP) waiver is a useful form of protection for anyone who has taken out a loan to buy a car, whether it is new or used. This is because, in the event of theft or a serious accident, a GAP waiver can cover the difference between the insurance payout and the remaining loan balance.

In the US, 84.6% of new cars and 54.6% of used cars are financed, with 29.92% of cars being leased. When a car is written off, insurance companies will pay out the car's book value or actual cash value (ACV), which takes into account the car's age, depreciation, mileage, and other factors. This means that the insurance payout may not cover the full balance of the loan, leaving the borrower to pay the difference.

A GAP waiver is particularly important for those who:

• Put little to no money down on their car purchase, as this can lead to a higher loan balance and an increased likelihood of being "underwater" on the loan.
• Have an upside-down or underwater loan, where the loan balance exceeds the value of the car, resulting in a high loan-to-value (LTV) ratio.
• Expect to put more mileage on their car than average, as this can accelerate depreciation and lead to a smaller payout if the car is a total loss.
• Have a car that depreciates quickly, such as certain luxury models.
• Have a high-interest loan, as the bulk of monthly payments go towards paying down the interest first, leaving the principal amount largely untouched in the early stages of the loan.
• Have a long-term loan, as this can result in a longer period of time before building up sufficient equity in the vehicle.

In summary, a GAP waiver can provide valuable protection against unexpected expenses and financial hardship for anyone who has financed their vehicle through a loan. It ensures that, in the event of a total loss, the borrower is not left with a significant financial burden.

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