GAP insurance (Guaranteed Auto Protection or GAP for short) covers the difference between what you still owe on your loan or lease agreement and the actual worth of your vehicle after an accident or total loss, providing financial relief that usually covers many expenses.
Gap coverage may be required by loan or lease agreements, and may make sense for drivers who put little or no down payment money down on their vehicle purchase. But it may not always be necessary.
What is GAP Coverage?
Gap insurance covers the difference between your car’s actual cash value and what is still owed on its loan or lease agreement in case of an accident, theft, or another covered event. It typically forms part of a full coverage policy which also provides collision and comprehensive protection; gap coverage can be purchased from an auto insurer, dealer where you purchased it or lender. While not required in any state, gap insurance can be beneficial to drivers at risk of losing more money than its value if their vehicle is totaled or stolen.
After your vehicle is totaled, your insurance company will compensate you based on its depreciated value, or what would cost to buy an equivalent used model from another source. But this amount could differ significantly from what is owed on its loan or lease balance; gap insurance provides coverage that helps bridge this difference by covering any shortfall between those payments and what was left after depreciation has taken effect.
Gap coverage typically will not cover the costs associated with vehicle repairs or engine failure, collision coverage should cover any associated damage and personal injury protection should cover injuries suffered as a result of an accident, while gap insurance typically does not cover late payment fees or any non-accident related costs.
Many drivers can avoid gap insurance altogether by paying off their loan or lease early before its value drops dramatically. Before purchasing, do your research on vehicles and price guides such as Kelley Blue Book; make extra payments than necessary each month so you’ll pay off faster, potentially eliminating gap insurance altogether.
Some dealers and lenders offer gap coverage as part of the car sales or financing process, but it can often be found more economically through an auto insurance provider. Some providers even include gap coverage as an add-on policy – making it convenient and cost effective for drivers to take advantage of this coverage option.
How Does GAP Coverage Work?
GAP coverage provides protection from the difference between your loan balance and its actual cash value, should your vehicle be totaled or stolen, in case it’s totaled or stolen. While you must still cover deductible costs of auto insurance policy – depending on how quickly your car depreciates or how large your deductible is; gap coverage could help save significant out-of-pocket money when an accident happens. Its main advantage lies in helping avoid large out-of-pocket payments for remaining balances on loans or lease agreements that might otherwise require large payments out-of-pocket.
Many individuals need GAP coverage as their cars depreciate faster than their loan balance is paid down. This is particularly relevant to people with longer loan terms or higher interest rates who increase the likelihood that their vehicle’s value will decrease before its loan balance has been settled.
Specifically, if your vehicle is totaled after one year of ownership, its insurance provider is likely only going to compensate you for its actual cash value (ACV), which may fall below what you still owe on it. As this could leave a sizable bill owed on its completion, GAP insurance should always be considered by new car owners as protection against debt settlement costs.
Make a substantial down payment or pay the full price upfront and you may be able to avoid gap insurance altogether. A down payment of 20% of your vehicle’s asking price could significantly decrease the need for gap insurance by decreasing the gap between its value and what you owe on it.
Even if you can purchase your vehicle without financing it or gap insurance, collision and comprehensive coverages should still be part of your overall auto insurance package. They protect against damages to or theft of your vehicle while meeting most lenders’ requirements for coverage.
What is the Cost of GAP Coverage?
As its name implies, gap coverage helps you bridge the gap between what you owe on your car and its actual cash value. The cost of gap insurance varies depending on where it’s purchased; typically speaking, auto insurers tend to offer less expensive plans while dealerships may add costs of their own; in general, however, insurers tend to provide cheaper policies. When purchasing through dealers it can often cost more.
Gap insurance provides peace of mind if your loan or lease payments exceed its true worth, especially with newer cars that depreciate quickly. Should an accident result in totalling or theft, your insurance policy typically pays the vehicle’s actual cash value minus any applicable deductible – yet that could still fall far short of what’s owed on the loan or lease contract. Gap protection covers that gap so you don’t end up paying for something you no longer possess or can drive.
Gap insurance provides protection in cases where your new car costs $20,000 but was totaled two years later in an accident, but your insurer only paid out $15,000; gap insurance will fill that $5,000 “gap”.
Avoid gap insurance by either buying a vehicle that costs more than what you’re financing it for or by increasing your down payment – usually 20% or more is enough. When canceling gap coverage from auto insurance policies when no longer necessary (usually by calling up providers and cancelling), or purchasing it directly at dealerships (where its cost will be spread out evenly over loan payments and won’t make much of a difference to monthly costs).
How Can I Get GAP Coverage?
Gap insurance provides protection between your car’s actual cash value and what you owe on its loan or lease agreement. Many lenders and dealerships include gap coverage as part of your vehicle loan or lease contract, while private providers also offer it independently from auto policies. When shopping around for gap coverage it’s important to carefully read through each provider’s terms and conditions – some insurers limit how long the coverage lasts, while others allow you to cancel it once your loan balance has fallen below its actual cash value.
After declaring your car totaled, auto insurance will typically pay the actual cash value less any applicable deductibles; however, this could leave a large loan balance to cover. Gap coverage helps bridge this gap by covering any outstanding balance on loans or lease agreements that arise after theft or destruction of your car.
Gap insurance may become necessary if you’re financing your new vehicle without making a substantial down payment, as this increases the risk of rapid depreciation and negative equity in its first few years of ownership.
If your car is declared totaled, its actual cash value will be determined based on its current market value and historical depreciation. Gap insurance was designed to prevent this scenario. A lower purchase price can leave an outstanding loan payment on an automobile no longer in your possession; gaps insurance is designed to safeguard against this happening. Purchase of gap coverage through either your lender or dealer can add an up-front fee and interest charge, but independent providers also provide gap insurance options. There may be benefits in purchasing this form of protection; it’s just important to weigh each option carefully to find what is best suited to your circumstances.
