Guaranteed asset protection coverage, or GAP insurance, is used to protect car owners in situations where the car loan is higher than the car’s worth. So, if a new car with a value of $30,000 is totaled, but the remaining loan for the car is $32,000, then GAP insurance will cover the extra $2,000 from the car loan.
If a car is totaled before the loan is paid off, then the car loan may be higher than the actual value of the car. Even with full auto coverage, owners might be on the hook for paying off a loan on a car that isn’t worth the money.
Luckily, there’s GAP insurance is specifically designed for these cases.
According to the Insurance Information Institute, there are a number of situations where GAP insurance could be necessary:
- Low down payment – If a new car is purchased with a down payment of 20 percent or less, then it could lose value faster than the loan is paid off.
- Long financing period – If a new car is financed for 60 months or more, then the loan may still be high after the car has lost much of its value.
- Car Lease – If a car is leased instead of purchased, then GAP insurance is important to obtain and may even be required for the lease.
- Cars with fast depreciation – Some cars tend to lose value faster than others. Researching a new car before purchasing it will help to determine how it retains value.
Rolled-over loan – When purchasing a new car while still paying off an old car loan, the negative equity will be rolled over, which increases the loan amount on the new car.
How GAP Insurance works?
If a new car is damaged to the point where it is considered a “total loss,” then full coverage auto insurance might not be enough to cover the car loan. In this case, GAP insurance would come into play.
When a financed or leased car is badly damaged or totaled in an accident, the owner will probably owe more than the car is worth. Collision or comprehensive coverage will pay for the car’s actual cash value, and GAP insurance will cover the remaining amount of the car loan.
Where can you get GAP Insurance?
GAP insurance can be purchased from three different providers. Dealerships usually offer it when people buy a new car, and many auto insurance companies offer GAP insurance, as well. There are even companies who specialize in GAP insurance.
Although GAP insurance is offered at dealerships, insurance providers generally provide lower rates. According to the Insurance Information Institute, GAP insurance, when added to a full coverage policy, only increases the annual premium by $20 on average.
Just like auto insurance, it’s a good idea to shop around for a few GAP insurance quotes before settling on a provider.
Frequently Asked Questions
How much does gap insurance cost?
Although the Insurance Information Institute estimates that GAP insurance only costs an average of $20 more on full coverage auto policies, the actual cost of GAP insurance will change from person to person. The driver’s age, state location and previous insurance claims will all factor into the cost, as well as the car’s actual cash value.
How do I get the best deal on gap insurance?
The best deal on GAP insurance will probably come from the driver’s auto insurance provider, because the insurance will not need to be purchased separately. Instead, it will be added on to the driver’s existing auto policy. If you decide to do it separately, the best way to find the best deal is to get quotes from different companies to compare.
Do you get money back from gap insurance?
If the GAP insurance premiums have been paid for the full loan term, but the loan is paid off early, then the driver may be issued a GAP refund of the remaining premium amount.
What does GAP insurance exclude?
Just like auto insurance, GAP insurance will only pay for perils included in the policy—and these perils can change from policy to policy. Before signing up for GAP insurance, check the coverage details to find out what is excluded.