Gap Insurance: Honda's Secret Weapon

GAP insurance, or Guaranteed Asset Protection, is an optional type of car insurance that covers the difference between what a car is worth and what the driver owes on their auto loan or lease if the car is stolen or written off. This type of insurance is particularly useful for those who have recently purchased a car, as new cars depreciate the fastest during the first few years, leaving a gap between the car's market value and what the owner paid for it. GAP insurance can be purchased directly from a dealership, lender, or lessor, or from a car insurance company.

When is the best time to get GAP insurance?

GAP insurance is a valuable form of protection for your car, but it is most beneficial during the early years of your car's life. This is because, in the event of a total loss, GAP insurance will cover the difference between the outstanding loan of your vehicle and its actual cash value (ACV).

• Low down payment: If you have made a small down payment or no payment at all, purchasing GAP insurance is a good idea. A low down payment increases the likelihood of being "upside down" or having negative equity if something happens during the first few years of a loan.
• Negative equity: If you have rolled the negative equity from a previous car loan into a new loan, GAP insurance can help protect you.
• Extended terms: If your loan is financed for 72 months or longer, you should consider adding GAP coverage.
• High depreciation: Vehicles that are prone to significant depreciation, such as loaded luxury cars and some domestic brands, are good candidates for GAP insurance.
• Leasing: Vehicle leasing can sometimes involve an inflated valuation, so a GAP policy can be beneficial if the worst happens.
• Long loan tenure: If your loan tenure is four to five years, you should consider getting GAP insurance.

On the other hand, you may not need GAP insurance if:

• You have paid a down payment of 20% or more.
• You are paying off the balance with a short loan term.
• You have the funds to repair or replace a totaled vehicle.
• You have owned your car for longer than two or three years, as GAP insurance is most valuable in the early stages of a lease or financed purchase.

Additionally, it is worth noting that GAP insurance is not required by law, and there are alternative insurance options available that may provide similar coverage. Before purchasing GAP insurance, it is important to understand its terms and conditions to ensure that it will offer the required financial support in the event of a total loss.

How does GAP insurance work?

GAP insurance, or Guaranteed Asset Protection insurance, is an optional type of car insurance that covers the difference between what a car is worth and what the driver owes on their auto loan or lease if the car is stolen or declared a total loss.

When a car is declared a total loss, standard insurance policies will cover the car's current market value. However, this value is often less than what the driver paid for the car, as new cars depreciate the fastest during the first few years of ownership. This leaves a "gap" between the car's market value and what the driver owes on their loan or lease. GAP insurance covers this gap, ensuring that drivers are not stuck paying off the remaining balance on a vehicle they can no longer drive.

For example, let's say you buy a $50,000 car with a down payment of $10,000. Three years later, the car is worth $20,000, but you still owe $24,000 on the loan. If the car is totaled in an accident or stolen and declared a total loss, your normal insurance policy will pay $20,000, or the car's actual cash value, minus your deductible. Without GAP insurance, you would still owe $4,000 and would have to pay off the car even though you can no longer drive it. With GAP insurance, the remaining $4,000 would be covered by the insurance company.

GAP insurance is particularly useful if you have made a small down payment (less than 20%) on a large loan, have a long-term loan (60 months or longer), or have a car that depreciates in value quickly. It can be purchased directly from a dealership, lender, or lessor for a one-time cost of around $400 to $700, or from a traditional car insurance company for $20-$40 per year.

What does GAP insurance cover?

GAP insurance, or Guaranteed Asset Protection insurance, covers the difference between the current value of your Honda vehicle and the amount you owe on it if it is declared a total loss due to an accident or theft. This type of insurance is optional and can be added to your existing coverage. It is designed to protect car owners financially in the early years of their car's life when depreciation is most significant.

When a car is declared a total loss, standard insurance policies will only cover the car's current market value or actual cash value (ACV). GAP insurance covers the "gap" between this amount and the remaining loan or lease balance, ensuring that you do not have to continue paying off a vehicle that you can no longer drive. This gap can be significant, especially if your car is new, as a new car loses about 10% of its value as soon as you drive it off the lot and can depreciate by about 20% within the first year.

In addition to accidents and theft, GAP insurance covers damages from other incidents, such as natural disasters. It is important to note that not all GAP policies will cover the deductible paid on your main insurance. The cost of GAP insurance varies depending on the provider and can be purchased from insurance companies, dealerships, or lenders.

Overall, GAP insurance provides valuable financial protection for car owners, ensuring they are not left with a significant financial burden if their vehicle is declared a total loss.

Is GAP insurance necessary?

GAP insurance is not a legal requirement, but it can be very useful if you want to protect your finances in the event that your car is written off or stolen. GAP insurance is designed to cover the difference between the amount you owe on your car loan or lease and the car's actual cash value (ACV) in the event of a total loss. This can be especially important in the early years of a car's life when the loan amount is likely to be higher than the car's value.

GAP insurance is a good idea if you've made a small down payment or no down payment at all on your vehicle. It's also worth considering if you have a long loan term, such as 72 months or longer. If you're leasing a car, GAP insurance is usually required and may even be included in the contract. It's also a good idea to get GAP insurance if your car is likely to lose its value quickly.

If you've paid a substantial down payment of 20% or more, you may not need GAP insurance. Similarly, if you're paying off your car with a short-term loan, you're less likely to need it. If you have the funds to repair or replace a totaled vehicle, GAP insurance may not be necessary. After a few years, when you've reached the end of a lease term or have owned your car for a while, GAP insurance becomes less valuable.

The cost of GAP insurance varies depending on where you get it from. You can purchase it from an insurance company, a dealership, or a lender. If you buy it from an insurance company and bundle it with your collision or comprehensive coverage, it will cost around $20 per year. If you buy it from a lender or dealership, you'll likely pay a one-time fee of $400 to $700.

How much does GAP insurance cost?

The cost of GAP insurance varies depending on where you buy it. Dealerships and banks typically charge a one-time fee of $400 to $700 for GAP insurance, making them the most expensive option. This sum is usually added to your auto loan, and you will have to pay interest on it.

The best deals on GAP insurance are generally available from car insurance companies, which charge as little as $3 per month or $20 to $40 per year for coverage. Instead of charging a lump sum, insurers include the cost in your regular premium payments.

Several factors could affect the amount you'll pay for GAP insurance, including:

• Your demographics and driving record
• The actual cash value (ACV) of the vehicle when it was purchased or leased
• The state where the GAP insurance is purchased

Frequently asked questions