Aias Gap Insurance: Protection For Your Car Loan

Gap insurance is a type of auto insurance that covers the difference between the value of your vehicle and the amount you owe on your car loan or lease. It is an optional, add-on coverage that can help certain drivers cover the “gap” between the financed amount owed on their car and the car’s actual cash value. If your car is declared a total loss, gap insurance will pay the difference between your car’s actual cash value and the amount owed for it.

When is gap insurance needed?

Gap insurance is a type of optional, add-on coverage that can help certain drivers cover the difference between the amount they owe on their car and the car's actual cash value (ACV) in the event of a total loss. This type of insurance is intended for drivers who are concerned about the "gap" between what they owe on their car loan and the car's depreciated value.

• Small Down Payment: If you made a small down payment on your car, such as less than 20%, you may want to consider gap insurance. A small down payment means you start with negative equity, and the amount you owe in car payments can quickly exceed your car's value.
• Long Finance Period: If you have a long finance period, such as a car loan of five years or more, gap insurance can be a good idea. This is because the longer the finance period, the more likely it is that you will owe more on your loan than your car is worth.
• Quick Depreciation: If you purchased a vehicle that depreciates faster than the average, gap insurance can be beneficial. Some cars, such as luxury cars or electric vehicles, can depreciate by more than 50% in just a few years.
• Negative Equity: If you rolled negative equity from your previous car loan into your new loan, gap insurance can help protect you. Make sure to get a policy that specifically covers negative equity, as not all gap insurance policies do.
• Lease Requirement: Many auto leases require gap insurance as a protective measure. In some cases, gap insurance may already be included in the price of the lease.

It's important to note that gap insurance is not necessary if you don't have a car loan or lease, or if the amount you owe on your car is less than or close to its current value. Additionally, gap insurance does not cover theft, engine failure, transmission failure, death, or your car insurance deductible. It is also important to compare the cost of gap insurance from different providers, as it can be significantly more expensive when purchased through a dealership or lender compared to an insurance company.

What does gap insurance cover?

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 the insurance company pays out if your car is stolen or totaled. GAP insurance is designed for people who finance or lease their vehicles. It covers the difference between the actual value of the car and the outstanding balance on a loan or lease.

For example, if you finance a $25,000 car and a few months later, it is in an accident and declared a total loss by the insurance adjuster, your standard insurance will cover the loss. The insurance adjuster determines that the actual cash value of your car is $20,000, but your loan balance is $24,000. In this case, you owe more on your loan than the car is worth, and a gap insurance policy would cover the remaining $4,000 that you would otherwise have to pay out of pocket.

GAP insurance only covers you if your vehicle is totaled or damaged, and you owe more on your loan than the car is valued at when the incident happens. You can file a claim if your car was stolen or totaled in an accident. It is important to note that GAP insurance does not cover costs related to vehicle repairs, personal injuries, or other accident-related expenses. It also does not cover engine failure, transmission failure, death, or your car insurance deductible.

The cost of GAP insurance varies but typically ranges from $20 to $40 per year when bundled with an existing policy, or $200 to $300 when purchased independently. It is generally much cheaper to purchase GAP insurance from an insurance company than from a dealership or lender.

How does gap insurance work?

Guaranteed Asset Protection (GAP) insurance is an optional, additional coverage that can help certain drivers cover the difference between the amount they owe on their car and the car's actual cash value (ACV) in the event of a covered incident where their car is declared a total loss.

When you buy or lease a new car, it starts to depreciate in value the moment it leaves the car lot. Most cars lose 20% of their value within a year. Standard auto insurance policies cover the depreciated value of a car, meaning a standard policy pays the current market value of the vehicle at the time of a claim.

If your car is in an accident and is badly damaged or written off, gap insurance covers the difference between what a vehicle is currently worth (which your standard insurance will pay) and the amount you actually owe on it.

For example, if you owe $25,000 on your loan and your car is only worth $20,000, your gap coverage will cover the $5,000 gap, minus your deductible.

You must have collision and comprehensive insurance in order to buy gap coverage.

Gap insurance is typically offered by car insurers and dealers. It can also be purchased independently or bundled with your existing policy. The cost varies depending on factors such as the current ACV of your car, the state you live in, and your previous car insurance claims.

How much does gap insurance cost?

The cost of gap insurance depends on several factors, including whether you bundle it with an existing insurance policy or purchase it separately.

Purchasing Gap Insurance Through Your Auto Insurer

If you buy gap insurance from your regular auto insurer, it will typically cost around $20 per year. This is a relatively affordable option, adding only about 5-6% to your comprehensive and collision insurance costs.

Adding Gap Insurance to an Auto Loan

If you take out a loan to purchase your car, you may have the option to add gap insurance to the agreement. In this case, you'll usually pay a one-time flat rate, ranging from $500 to $700. This option is more expensive than purchasing through your insurer, and you'll pay interest on the sum since it's rolled into your loan.

Purchasing Standalone Gap Insurance

Some auto insurers offer gap insurance as a standalone, separate coverage option. This option typically costs a one-time fee of $200 to $300.

Factors Affecting Gap Insurance Cost

The cost of gap insurance can also depend on factors such as the vehicle's actual cash value (ACV), your location, and your previous car insurance claims.

Average Cost of Gap Insurance

Overall, the cost of gap insurance is relatively low, with an average of around $20-$40 per year when bundled with an existing policy. Purchasing gap insurance separately or through a dealership can cost significantly more, with rates ranging from $200 to $600 or more per year.

Where can you buy gap insurance?

Gap insurance can be purchased from several sources, including insurance companies, car dealerships, auto loan lenders, banks, credit unions, or specialised providers. It is recommended to buy gap insurance from your auto insurance company as it may be cheaper 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, as long as your loan or lease hasn't been paid off.

Some insurers might sell gap insurance as a standalone policy, but it's more commonly added to your existing auto insurance policy. When you buy or lease a car, the dealer will likely ask if you want to purchase gap insurance when you discuss your financing options. Buying gap insurance from a dealer can be more expensive if the cost of the coverage is bundled into your loan amount, which means you would be paying interest on your gap coverage.

Some lenders may add a gap waiver to your car loan or lease, which would serve the same purpose as gap insurance. Gap insurance is typically only available if you are the original loan or leaseholder on a new vehicle, but you may be able to obtain it for certain used vehicles.

If you are in Kansas, USAA offers the cheapest gap insurance, at about $995 per year on average.

Frequently asked questions