Orlando Harmon
A lender's letter for gap insurance is a document that may be required when cancelling gap insurance after fully paying off a loan. Gap insurance, or guaranteed asset protection, covers the difference between what you owe on a loan and what the asset—in this case, a vehicle—is worth if it is damaged or stolen. Gap insurance is often purchased in addition to a vehicle insurance policy, and in the event of an accident or theft, the gap insurance provider will pay out the difference to the lienholder.
| Characteristics | Values |
|---|---|
| Purpose | To protect the borrower in the scenario where they owe more on their loan or lease than the car is worth |
| What it covers | The difference between what is owed on a loan and the car's worth at the time it was stolen or totaled |
| When it pays | When the borrower's vehicle insurance company determines the actual cash value of their vehicle |
| Documents required | Insurance settlement statement, settlement check, loan or lease contract, loan history, police report, sales agreement |
| When to cancel | When the loan balance is lower than the vehicle's actual cash value |
| Refund | Available if the policy was paid in advance and cancelled early, or if the loan was paid off early |
What You'll Learn
When is a lender's letter required?
A lender's letter for gap insurance is required when you need to prove that you have guaranteed asset protection (GAP) insurance for your vehicle. This type of insurance covers the difference between the amount you owe on your auto loan or lease and the current value of your vehicle if it is stolen or declared a total loss. While GAP insurance is not required by state law, it may be required by lenders and lessors.
- When purchasing a new vehicle: If you are financing a new vehicle, your lender may require you to obtain GAP insurance, especially for certain types of vehicles that are known to depreciate quickly, such as luxury cars or electric vehicles.
- Leasing a vehicle: When you lease a vehicle, it is common for leasing companies to require GAP insurance as part of the lease agreement. This protects them from lessees who may walk away from the lease if the vehicle is stolen or totalled.
- Refinancing an existing auto loan: If you are refinancing your auto loan with a new lender, they may request a lender's letter to confirm that you have GAP insurance in place. This is to ensure that their investment is protected in the event of a total loss.
- Adding GAP insurance to your existing auto insurance policy: When you add GAP insurance to your comprehensive auto insurance policy, your insurance provider may require a lender's letter to verify the details of your auto loan or lease.
- Claim settlement: In the unfortunate event that your vehicle is stolen or totalled, your GAP insurance provider will need to verify your loan or lease details before processing the claim and issuing the payout.
It is important to note that GAP insurance is optional in most cases, and you have the right to refuse it if a dealer or lender pressures you to purchase it. However, it can provide valuable financial protection if you find yourself in a situation where you owe more on your auto loan or lease than your vehicle is worth.
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What is GAP insurance?
Guaranteed Asset Protection (GAP) insurance 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 totaled. When you buy or lease a new car or truck, the vehicle immediately starts to depreciate in value. Most cars lose 20% of their value within the first year. Standard auto insurance policies cover the depreciated value of a car, which means they pay the current market value of the vehicle at the time of a claim. However, in the early years of ownership, the loan amount may exceed the market value of the car. This is where GAP insurance comes in. It covers the difference between what a vehicle is currently worth (which your standard insurance will pay) and the amount you owe on it.
For example, if you owe $20,000 on your car loan and your car is totaled, your standard insurance might only pay $15,000, which is the current market value of the car. In this case, GAP insurance would cover the remaining $5,000 that you owe on the loan.
GAP insurance is typically offered by car dealers when you purchase or lease a car. It can also be purchased from your auto insurance company or some direct lenders. If you choose to finance a GAP policy into your loan, it will increase the total amount you pay in interest over time. It's important to compare prices and coverage before purchasing GAP insurance. You may also be able to negotiate the terms of your auto loan, which can save you money.
GAP insurance is designed to protect you financially when you owe money on a depreciated vehicle. It is a good idea to consider buying GAP insurance if you made a small down payment (less than 20%), financed for 60 months or longer, leased the vehicle, purchased a vehicle that depreciates faster than average, or rolled over negative equity from an old car loan. Keep in mind that GAP insurance doesn't cover repairs to your vehicle, damage to someone else's vehicle, or additional charges related to your loan or lease agreement.
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How does GAP insurance work?
Guaranteed Asset Protection (GAP) insurance 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 situations where the loan balance is higher than the value of the vehicle. GAP insurance is offered by car dealers and direct lenders, and the cost can be included in the loan amount. However, this will increase the total interest paid over time.
When purchasing a car, dealers may offer GAP insurance, but it is not mandatory and can be declined. It is worth noting that some leasing companies may require GAP insurance for leased vehicles. GAP insurance is designed to protect you from depreciation, which starts as soon as you buy a car. This depreciation creates a gap between what you owe and the car's value. For example, if you owe $25,000 on your loan and your car is only worth $20,000, GAP insurance would cover the $5,000 difference, minus any deductible.
To qualify for GAP insurance, you must have comprehensive and collision coverage on your policy. GAP insurance applies when your vehicle is stolen or totaled in an accident. When you file a qualifying claim, your comprehensive or collision coverage will pay the actual cash value (ACV) of your vehicle, minus your deductible. GAP insurance may then pay the difference between your vehicle's ACV and the outstanding balance of your loan or lease. It is important to note that GAP insurance does not cover additional charges related to your loan, such as finance or excess mileage charges, nor does it cover engine failure or other repairs.
The process of filing a GAP insurance claim can be done in person, over the phone, or online, depending on the provider. The claim can take several weeks to process, as the vehicle insurance company must first determine the actual cash value of your vehicle. The GAP insurance provider will then verify the loan or lease details before approving the payout. When filing a claim, you will need to provide documentation showing the difference between what you owe on your loan or lease and the value of the car at the time of the incident. This may include an insurance settlement statement, a settlement check, a loan or lease contract, a loan history, a police report, and a sales agreement.
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When can you get a GAP insurance refund?
A gap insurance claim can take several weeks to process, and it depends on the circumstances of the accident or theft that led to the claim. The insurance company must first determine the actual cash value of the vehicle.
You can get a gap insurance refund if you paid in advance for coverage and cancel the policy early. Gap insurance refunds are most commonly issued after a loan is paid off early, or the car is sold or traded in. You will not get a refund if you have filed a claim against the policy.
The refund will be a prorated amount based on what you paid in advance and how much time is left on the policy. If you are cancelling within 30 days of the policy's start date, you might get a full refund minus any cancellation fees. In other cases, only a partial refund may be possible. The amount of the refund may depend on the loan amount, mileage, value of the vehicle, and other factors. Check with your gap insurance company for details.
You can get a gap insurance contract refund if you cancel the policy early and have paid in advance for coverage. Before you cancel, ensure that gap insurance isn't a requirement of your loan or lease, or that you have met the contract's requirements to cancel the coverage. Usually, this means that you have paid off the loan or have enough equity in the vehicle that there is no longer a gap between the vehicle's value and the loan amount.
You can cancel your gap insurance if you sell or trade in the vehicle. You can't get a gap insurance refund after a total loss if you filed a claim against the policy. However, if you got enough from your car insurance to pay off your loan and don't need to file a gap insurance claim, you may be able to get a refund.
Every insurance company is different, but you can usually get a gap policy refund at any point before the policy period expires.
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What is the GAP insurance claims process?
A GAP insurance claim can take several weeks to process, depending on the circumstances of the accident or theft that led to the claim. The first step is for your vehicle insurance company to determine the actual cash value of your vehicle. Following this, your GAP insurance provider will verify your loan or lease details before your GAP coverage pays out. Depending on the provider, you may be able to file your GAP insurance claim in person, over the phone, or online. If your vehicle is stolen or totaled, and your comprehensive car insurance or auto collision coverage claim is approved, your GAP insurer will pay your lienholder what is owed under your GAP insurance policy.
You will need to provide documentation that shows the difference between what you owe on your loan or car lease and what the car was worth when it was stolen or totaled. The list of documents that the GAP insurance company may ask you to provide includes:
- Insurance settlement statement
- Settlement check
- Loan or lease contract
- Loan history
- Police report
- Sales agreement
If you purchased GAP insurance through the same company that provides your comprehensive and collision coverage, they would have access to some of these documents, which can help simplify the claims process.
It is important to note that you must continue making your loan/lease payments after filing a claim until you receive your settlement check. Failure to do so can negatively impact your credit score.
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Frequently asked questions
A lender's letter for gap insurance is a document that verifies that your car loan has been closed. This letter is required by insurance companies when you cancel your gap insurance policy after fully paying off your auto loan.
A gap waiver, also known as a gap addendum, is a debt cancellation agreement that absolve you from paying the difference between what you owe on the vehicle and its worth if it is declared a total loss. Gap insurance, on the other hand, covers the difference between what you owe and the car's actual cash value (ACV) in the event the vehicle is totaled or stolen. While a gap waiver is attained through your lender or lease company, gap insurance is typically added to your auto insurance policy or purchased through the dealership.
A gap insurance claim can take several weeks to process, depending on the circumstances of the accident or theft that led to the filing. The vehicle's actual cash value must first be determined by your insurance company, after which your gap insurance provider will verify your loan or lease details before the gap coverage payout.
When filing a gap insurance claim, you will need to provide documentation showing the difference between what you owe on your loan or car lease and the car's value at the time of the incident. This may include an insurance settlement statement, a settlement check, a loan or lease contract, a loan history, a police report, and a sales agreement.
Yes, you can get a gap insurance refund if you paid in advance for coverage and cancel the policy early, typically after paying off the loan early or selling/trading in the car. The refund is a prorated amount based on what you paid in advance and the remaining time on the policy.
