Jane Dotson
GAP insurance, or Guaranteed Asset Protection, is an optional insurance coverage that pays the difference between your car's value and the amount you owe on your loan if your car is stolen or totaled in an accident. It is typically purchased when the loan balance exceeds the car's value, and its cost depends on factors like the make and model of the vehicle, the rate of depreciation, and the driver's age. While GAP insurance provides added financial security, it is not always necessary and may not be worth the cost if the vehicle's value is higher than the loan balance or if the driver can afford to pay the difference.
| Characteristics | Values |
|---|---|
| Purpose | Covers the difference between the insurance payout and the remaining loan balance in case of a total loss |
| Use cases | When the loan-to-value ratio exceeds 100%, i.e., the loan balance exceeds the car's value; when the vehicle is new or prone to fast depreciation; when the loan term is longer than two years |
| Cost | Relatively low-cost, typically $60 a year for coverage through an auto insurance provider; can be as low as $20 per year or as much as $500-$700 as a flat fee |
| Where to buy | From an insurance company, dealership, or lender; can be purchased at any time, but typically suggested at the time of purchase or lease |
| Alternatives | New car replacement coverage, better car replacement coverage |
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What You'll Learn
When is GAP insurance worth it?
GAP insurance, or Guaranteed Asset Protection, is a relatively low-cost insurance coverage plan that covers the difference between the cash value of your vehicle and the amount you still owe on it. It is worth considering if your vehicle is likely to depreciate quickly, or if you have little equity in it.
When you take out a loan to buy a car, you may be offered GAP insurance by the dealership or lender. This is because, in the event of an accident or theft, standard car insurance policies will only cover the current market value of the vehicle. GAP insurance covers the "gap" between this payout and the remaining loan balance. This can prevent you from having to pay large sums out of pocket to cover the difference.
GAP insurance is particularly useful if you have a high loan-to-value (LTV) ratio, meaning you owe more on your loan than your vehicle is worth. This can happen if you put little or no money down when financing your car. It is also common with vehicles that depreciate quickly, such as luxury sedans or SUVs. In these cases, GAP insurance can protect you from being left with a large bill if your vehicle is written off or stolen.
GAP insurance is typically offered for brand-new vehicles or those less than three years old. It is usually cheaper to purchase through an insurance company than a dealer or lender. The cost of GAP insurance can depend on various factors, including the make and model of the vehicle, the rate of depreciation, your age, and your claims history.
While GAP insurance can provide valuable peace of mind and financial protection, it is not always necessary. If you have a low LTV ratio and your vehicle is not at high risk of rapid depreciation, you may not need GAP insurance. Additionally, there are alternative coverage options available, such as new car replacement coverage and better car replacement coverage, which may be worth considering.
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When is GAP insurance not worth it?
GAP insurance is generally considered to be worth it, especially for borrowers with a high loan-to-value ratio, a vehicle with a high depreciation rate, an underwater loan, or other situations where the car's value is less than the loan balance. However, there are certain scenarios where GAP insurance may not be worth it:
- If you made a down payment of at least 20% of the car's value at the time of purchase, you may not need GAP insurance. A large down payment reduces the risk of owing more on your loan than the car is worth.
- If you expect to pay off your car loan in a short period, typically less than five years, GAP insurance may not be necessary. The longer the loan term, the higher the chance of owing more on the vehicle than its worth.
- If you have leased or financed a vehicle that holds its value relatively well, GAP insurance may not provide significant benefits. GAP insurance is particularly useful when the car's value drops below the loan balance.
- If you have alternative coverage options, such as loan or lease payoff coverage, or new car replacement coverages, GAP insurance might be redundant. These alternatives can provide similar protection in the event of a total loss or theft.
- If your loan-to-value (LTV) ratio is less than 100%car's value is higher than what you owe on your loan. In this case, the risk of owing more than your car's worth is lower, making GAP insurance less crucial.
It's important to note that the decision to purchase GAP insurance depends on various factors, including cost, coverage options, available providers, and individual circumstances. It is always recommended to carefully consider your specific situation and explore different options before making a decision.
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How does GAP insurance work?
GAP insurance, also known as Guaranteed Asset Protection, is an optional insurance product that covers the difference between the amount you owe on your auto loan and the amount your insurance company pays out if your car is stolen or deemed a total loss. This type of insurance is designed to protect you from financial loss in the event that your loan balance is higher than the value of your vehicle.
Here's how it works: when you purchase a car, you take out a loan to cover the cost. Over time, as you make payments towards the loan, the value of your car decreases due to depreciation. This can result in a gap between the amount you still owe on the loan and the current value of the car. If your car is then involved in an accident, stolen, or deemed a total loss, your standard car insurance will typically only pay out the amount your car is currently worth, leaving you with a remaining loan balance to pay off.
This is where GAP insurance comes in. It covers the difference between the insurance payout and the remaining loan balance, ensuring that you are not left with a financial burden. For example, if you owe $25,000 on your loan and your car is only worth $20,000 at the time of the loss, GAP insurance would cover the $5,000 gap, minus any deductible.
GAP insurance is typically purchased as an add-on to your existing auto insurance policy. It is important to note that GAP insurance does not cover other property damage, bodily injuries, engine failure, or regular repairs. Additionally, to qualify for GAP insurance, you usually need to have comprehensive and collision coverage on your standard auto insurance policy.
While GAP insurance is optional, it is recommended for borrowers who have a high loan-to-value ratio, vehicles with a high depreciation rate, or situations where the car's value is less than the loan balance. It provides financial protection and peace of mind, ensuring that you are not left paying for a car that is no longer driveable or in your possession.
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How much does GAP insurance cost?
The cost of GAP insurance depends on the underwriter. Dealerships and lenders charge higher prices for GAP insurance than car insurance companies. Lenders and dealerships sell GAP insurance for a flat rate, typically between $500 and $700, which are the highest rates for this type of policy. Plus, you will pay interest on the sum since it will be rolled into your loan.
Insurance companies, on the other hand, charge an average of $20 to $40 per year for GAP insurance when buyers bundle it into an existing insurance policy. This increases your comprehensive and collision insurance cost by about 5 to 6%. If you want to buy a standalone GAP insurance policy, you can expect to pay between $200 and $300.
GAP insurance is usually optional, though some lenders require borrowers to purchase coverage before financing a car loan. This requirement is more common if your loan-to-value (LTV) ratio exceeds 100%, which means the balance of your loan exceeds your car’s value. GAP insurance is a relatively low-cost insurance coverage plan, and it’s easy to obtain from your local insurers. Troy auto insurance companies may offer gap insurance for as little as $20 per year. Some dealerships or car loan companies may offer gap insurance or other vehicle insurance coverage.
GAP insurance can be added to many standard auto insurance policies for about $90 a month. Major insurers, including State Farm, Progressive, and Allstate, offer this coverage for an additional cost, typically around $90 per year or $7.50 per month. GAP insurance is an optional coverage that is usually very reasonably priced, typically less than $100 per year in additional premium when added as an endorsement to your existing auto insurance policy.
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Where can I purchase GAP insurance?
When purchasing a new car, you can get GAP insurance from the dealer or your auto insurance company. Dealerships or car loan companies may offer GAP insurance or other vehicle insurance coverage. However, buying GAP insurance from a dealer may be more expensive as the cost of the coverage is bundled into your loan amount, resulting in interest payments on your GAP coverage.
On the other hand, buying GAP insurance from an insurance company may be more cost-effective, and you won't have to pay interest on your coverage. You can typically add GAP coverage to an existing car insurance policy or a new policy, provided that your loan or lease hasn't been paid off. Some insurance companies may only offer a limited amount of time to purchase coverage.
Specialized car insurance companies will offer GAP insurance for a one-time fee. Some examples of companies that offer GAP insurance include Progressive, State Farm, and Geico.
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Frequently asked questions
Guaranteed Asset Protection (GAP) insurance is a supplemental insurance coverage option that pays out the difference between your auto insurance payout and the remaining loan balance after a covered loss.
GAP insurance is worth it for borrowers with a high loan-to-value ratio, a vehicle with a high depreciation rate, an underwater loan, and other situations in which the car’s value is less than the loan balance.
GAP insurance may not be necessary if you made a down payment of at least 20% of the car's value at the time of purchase, expect to pay off your car loan in less than five years, or financed or leased a vehicle that holds its value longer than most.
The cost of GAP insurance depends on various factors, including the make and model of a vehicle, the rate of depreciation, your age, and your vehicle claims history. According to USA Today, the average cost is $60 a year for coverage through an auto insurance provider.
