New cars lose value fast, which increases the financial risk for new car owners. If the new car is totaled before the car loan is paid down, the loan could be higher than the worth of the car.
Guaranteed asset protection coverage, commonly known as GAP insurance, protects owners from paying off car loans that exceed the value of the car.
If a new or leased car is totaled and the owner is stuck with a loan payment, even after the auto insurance kicks in, then GAP insurance will cover the remaining loan amount.
Do you need GAP Insurance?
GAP insurance is often required for leasing cars, and it’s highly recommended for purchasing brand new cars.
Without GAP insurance, car owners are left unprotected from expensive car loans that can cause serious financial issues if the car is damaged to the point that is labeled a “total loss” early in the loan’s term.
Here are examples of times when GAP insurance is important:
- Can’t cover gap out-of-pocket: the difference between the loan amount and the car’s actual cash value is too large to cover out-of-pocket
- Small down payment: the down payment is small compared to the overall amount of the car loan
- Long-term loan: The length of the loan is long (60+ months) and could possibly last longer than the car maintains a corresponding value
- Car with fast depreciation: Some makes and models lose value very fast and may leave the owner with a large loan to pay off
What is the Cost of GAP Insurance?
The cost of GAP insurance will range quite a bit depending on where it’s purchased.
Dealerships usually offer GAP insurance to new car owners at the time of purchase, but the insurance will probably be offered at a higher rate than if purchased through an auto insurer.
If the new car owner already maintains an active auto insurance policy, then checking with the policy provider will probably be a cheaper way to purchase GAP insurance.
According to the Insurance Information Institute, adding GAP insurance to a policy with comprehensive and collision coverage will only increase the annual premium about $20, on average.
Frequently Asked Questions
Why is GAP Insurance Cheap?
GAP insurance will probably only be cheap if purchased from an insurance provider who you already use for auto insurance. That way, a new policy will not need to be purchased. Instead, GAP insurance can be included as additional coverage in the existing policy.
Is GAP Insurance worth it on a used car?
While GAP insurance is strongly recommended when purchasing brand new cars, it is less of a necessity when buying a used car. The reason for this is that used cars do not depreciate in value as quickly as new cars.
The Insurance Information Institute estimates that new cars lose about 20 percent of their value in the first year of ownership.
What is the average cost for GAP insurance?
The cost of GAP insurance ranges significantly depending on the car, the driver, and where the insurance is purchased. If GAP insurance is purchased from a dealership with a car loan, then it can range from $500 to $700. If the GAP insurance is purchased as additional coverage in an auto insurance policy, the policy’s annual premium may only increase $20.