Gap Insurance: Protecting Your Auto Loan

Guaranteed auto protection (GAP) insurance is an optional form of auto insurance that covers the difference between the depreciated value of a car and the loan amount owed if the car is involved in an accident. In other words, it covers the gap between a vehicle's actual cash value and the outstanding balance on a loan or lease if the car is stolen or deemed a total loss.

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.

When you might need gap insurance

Gap insurance is a good idea if you meet any of the following criteria:

• You made a small down payment, e.g., less than 20%.
• You have a long finance period, e.g., 60 months or longer.
• You leased the vehicle. Gap insurance is generally required for a lease.
• You purchased a vehicle that depreciates faster than the average.
• You rolled over negative equity from an old car loan into the new loan.

In these instances, gap insurance could protect you against potentially negative financial consequences if the vehicle is declared a total loss.

When you might not need gap insurance

You may be able to skip gap insurance if:

• You made a down payment of at least 20% on the car when you bought it, so there’s little chance that you will be upside down on your loan.
• You’re paying off the car loan in less than five years.
• The vehicle is a make and model that historically holds its value better than average.

How gap insurance works

Gap insurance, which stands for Guaranteed Asset Protection insurance, is an optional add-on coverage that can help certain drivers cover the difference between the financed amount owed 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 or truck, the vehicle 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 they pay the current market value of the vehicle at the time of a claim. In the early years of the vehicle's ownership, the amount of the loan may exceed the market value of the vehicle itself.

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 covers the $5,000 gap, minus your deductible.

Gap insurance is typically only available for brand-new vehicles or for models that are less than three years old. It is designed for drivers with outstanding loan balances on their vehicles. It is important to note that gap insurance does not cover other property or injuries resulting from an accident, nor does it cover engine failure or other repairs.

To qualify for gap insurance, you must have comprehensive and collision coverage on your policy. Gap insurance is typically more expensive to purchase from a dealership than from an insurer. Some lenders and leasing companies may require you to purchase it, and dealerships may automatically add it to your loan, but you can decline this coverage.

What gap insurance covers

Guaranteed Asset Protection (GAP) insurance is an optional insurance product that covers the difference between the amount you owe on your auto loan and the amount the insurance company pays if your car is stolen or totaled. This type of insurance is designed for people who finance or lease their vehicles. It is important to note that GAP insurance is not legally mandated and does not cover costs related to vehicle repairs, personal injuries, or other accident-related expenses.

When you buy a new car, it starts to depreciate in value as soon as it leaves the dealership. Standard auto insurance policies typically only cover the depreciated value of the car, which is the current market value of the vehicle at the time of a claim. In contrast, GAP insurance covers the difference between the current market value of the vehicle and the amount you still owe on your loan. This can be especially useful if you have made a small down payment on the vehicle, as the amount of the loan may exceed the market value of the car in the early years of ownership.

For example, let's say you finance a $25,000 car. A few months after purchasing the vehicle, it is in an accident and the insurance adjuster declares it a total loss. Your collision or comprehensive insurance will cover the loss, but the insurance adjuster determines that the actual cash value of your car is only $20,000. However, your loan balance is $24,000, meaning you owe more on your loan than the car is worth. In this scenario, GAP insurance would cover the remaining $4,000 that you would otherwise have to pay out of pocket.

GAP insurance is typically offered by car dealerships, auto insurance companies, and sometimes banks and credit unions. It is often required for leased vehicles and is generally a good idea if you have financed your vehicle for 60 months or longer, made a down payment of less than 20%, or purchased a vehicle that depreciates quickly.

Pros and cons of gap insurance

Pros of Gap Insurance

Gap insurance can be a good idea for drivers who:

• Have a long finance period
• Made a small down payment (less than 20%)
• Leased a vehicle
• Bought a vehicle that depreciates faster than average
• Rolled over negative equity from an old car loan into the new loan

Gap insurance is worth considering if you are at risk of owing more on your car than it is worth. This type of insurance is relatively inexpensive, costing only a few dollars a month or around $20-$60 per year when added to a car insurance policy.

Cons of Gap Insurance

Gap insurance may not be necessary if:

• You made a large down payment on your car (20% or more)
• You are paying off your car loan in less than five years
• The vehicle is a make and model that holds its value better than average

If you are in this position, you may be able to skip gap insurance. It is also not necessary if you are not financing or leasing your car.

Additionally, if you buy gap insurance from a dealership and the cost is rolled into your car loan, you may end up paying more in the long run. This is because you will be paying interest on the cost of your gap insurance over the life of the loan.

How to get gap insurance

Gap insurance is an optional form of auto insurance that covers the difference between the amount owed on a vehicle loan and the vehicle's actual value in the event of theft or total loss. This difference is referred to as the "gap".

If you're looking to get gap insurance, here are the steps and things to consider:

Where to Get Gap Insurance

You can typically get gap insurance from your auto insurance company or the dealer where you bought or leased the car. Some auto lenders may also offer gap insurance. It is recommended to start by getting a quote from your insurer, as they often offer the best rates.

When to Get Gap Insurance

Gap insurance must be purchased at the same time as buying your car, and you must be the car's first owner. It can be added to an existing car insurance policy or a new policy, as long as your loan or lease hasn't been paid off.

Cost of Gap Insurance

The cost of gap insurance varies depending on factors such as the actual cash value of the vehicle and where you buy the coverage. It may be cheaper to buy it through your car insurance company compared to a car dealer or lender. In most cases, adding gap insurance to your full-coverage policy will increase your premium by around $40 to $60 per year.

Considerations

Before purchasing gap insurance, check if it is required by your lender or leasing company. In some cases, gap insurance might be automatically added to your loan by the dealership, but you have the option to decline it. Additionally, you need to have comprehensive and collision coverage on your policy to qualify for gap insurance.

Frequently asked questions