Understanding Gaap Insurance For Auto Loans

Guaranteed Asset Protection (GAP) insurance is an optional product that covers the difference between the amount owed on an auto loan and the amount paid by the insurance company in the event of theft or a total loss. GAP insurance is intended for situations where the loan balance is higher than the value of the vehicle. It is one of several optional add-on products that a dealer may offer when purchasing or leasing a car.

When is GAP insurance needed?

GAP insurance is needed when the amount owed on an auto loan is more than the vehicle's worth. It is an optional coverage that applies if a car is stolen or deemed a total loss. GAP insurance covers the difference between the amount paid out by the standard insurance coverage and the balance left on the vehicle loan or lease.

For example, if you owe $25,000 on your loan and your car is only worth $20,000, GAP insurance will cover the $5,000 difference, minus your deductible. GAP insurance is intended for people who finance or lease their vehicles. It is not required by law, but lenders or lessors may require drivers to carry it as a condition of a loan or lease.

GAP insurance is worth considering if you are in the following situations:

• Leasing your car: Lenders may require GAP coverage on leased vehicles.
• Making a lower down payment on a new car: If your down payment is less than 20% of the sale price, you could end up with negative equity on the vehicle.
• Having a longer financing term for your vehicle: The longer your vehicle is financed, the higher the chance of owing more than it's worth.
• Wanting protection against depreciation: Some cars have a higher depreciation rate than others.
• Having a loan rollover: GAP insurance can help protect you against negative equity if you owe more on your loan than your car is worth at the time of renewal.
• Buying a vehicle that will depreciate quickly: This includes some luxury vehicles or sports cars.
• Planning to put a lot of miles on your vehicle: This can speed up depreciation.
• Wanting to roll the balance of your previous car loan into the new vehicle loan: This can increase the chance of negative equity.

In summary, GAP insurance is needed when the loan amount exceeds the vehicle's value, and it provides financial protection by covering the difference. It is particularly relevant for leased or financed vehicles and can help protect against potential losses due to depreciation, negative equity, or total loss of the vehicle.

How does GAP insurance work?

GAP insurance, or Guaranteed Asset Protection, is an optional 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 intended for people who finance or lease their vehicles.

When your loan amount is more than your vehicle is worth, GAP insurance covers the difference. For example, if you owe $25,000 on your loan and your car is only worth $20,000, GAP insurance will cover the $5,000 gap, minus your deductible. This type of insurance protects you from depreciation, which can leave a gap between what you owe and the car's value.

To qualify for GAP insurance, you must have comprehensive and collision coverage on your policy. GAP insurance does not cover costs related to vehicle repairs, personal injuries, or other accident-related expenses. It is also not required by law, but some lenders or leasing companies may require you to purchase it.

The cost of GAP insurance can vary, and it can be purchased from a car insurance company, a dealership, or a lender. It is often offered as an add-on product when purchasing or leasing a car, and the cost can be rolled into the loan amount. However, it is important to note that financing a GAP policy into your loan will increase the total loan amount and the overall interest paid over time.

In summary, GAP insurance is an optional product that covers the difference between the amount owed on an auto loan and the vehicle's value if it is stolen or totalled, protecting individuals from depreciation and potential financial loss.

How much does GAP insurance cost?

The cost of GAP insurance depends on where you buy it from. Buying GAP insurance from a car dealership might seem convenient, but it can often end up costing you more in the long run. Car dealerships typically charge up to $600 for GAP insurance that can be added to your loan. If you add the coverage to your loan, you'll also pay interest on it, meaning you'll lose the flexibility to cancel the GAP insurance since it's tied to your loan.

On the other hand, buying GAP insurance from a car insurance company is much cheaper. GAP insurance costs an average of $61 a year, according to Forbes Advisor's analysis. It typically increases your premium by around $40 to $60 per year. The Insurance Information Institute also estimates that auto insurers charge a few dollars a month or around $20 a year for GAP insurance.

The cost of GAP insurance can also depend on your vehicle's value and your driving profile.

When should GAP insurance be dropped?

GAP insurance is a type of optional coverage that pays the difference between what your vehicle is worth and how much you owe on your car at the time it’s stolen or totaled. This type of insurance is useful when you owe more on your car loan than the car is worth.

• When your loan balance is lower than the current value of your car, you can consider dropping GAP insurance. This is because there will be little to no GAP insurance payout possible. For example, if you owe $15,000 on a car valued at $17,000, there won't be a gap if your car is stolen or totaled.
• If you sell your car, you should cancel GAP insurance as you no longer own the vehicle.
• If you have paid off your auto loan or paid enough of the balance that it is lower than the car's actual cash value, you may want to drop GAP insurance.
• If you change GAP insurance companies, you will need to cancel your current GAP insurance and switch to a new provider.

It is important to note that you should ensure you have a new policy in place before cancelling your current GAP insurance to avoid any lapse in coverage. Additionally, you may be eligible for a refund for the unused portion of your GAP insurance coverage, depending on the terms of your contract.

Where can GAP insurance be purchased?

GAP insurance can be purchased from several sources, including insurance companies, car dealerships, and auto loan lenders. You may also be able to acquire it from a bank, credit union, or specialised provider.

Many major auto insurers, including State Farm, Nationwide, Progressive, Allstate, USAA, AAA, and Esurance, offer stand-alone GAP insurance or coverage as an add-on to your existing policy. However, not all insurers offer GAP insurance, so you may need to shop around.

You can also purchase GAP insurance from the dealer or lender when buying or leasing a new car. The dealer will likely offer GAP insurance when discussing your financing options. However, buying GAP insurance from a dealer or lender can be more expensive, as the cost of the coverage may be bundled into your loan amount, resulting in interest payments on your GAP coverage.

It is recommended to compare prices and consider purchasing GAP insurance from your auto insurer rather than a dealership to avoid paying interest on the coverage.

Frequently asked questions