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What’s gap insurance on a car loan?

Here's what you need to know...

  • GAP insurance may provide extra coverage in the event of a total loss.
  • GAP insurance also offers coverage for stolen vehicles.
  • GAP insurance acts as supplementary insurance to your current auto insurance.
  • GAP insurance may be a requirement, depending on what financing company you have.

 Start comparing car insurance rates now y using our FREE tool above! If you’re in the market for buying a new vehicle, you may want to consider opting for GAP insurance on your next set of wheels. GAP insurance offers benefits that go above and beyond what the standard auto insurance policy offers. When the inevitable happens, find out how GAP insurance can help protect your investment.

What is GAP Insurance and Why is it Important?

Simply stated, “GAP insurance” stands for “Guaranteed Asset Protection.” Say you get into an auto accident and your insurance company assesses the damages of your vehicle to be a total loss. This is where GAP insurance comes in to cover the difference between what your car is worth according to the fair market value and what balance you still owe on your loan.

In many cases, the difference between the fair market value and the amount you owe could be a significant amount. Consider the fact that the moment you drive a brand new vehicle off the car lot, it is said to have already depreciated 20%. In just three years, your car could be worth only half of the purchase price!

What Happens if You Don’t Have GAP Insurance?

If you don’t have GAP insurance and your vehicle is deemed a total loss, your insurance company (assuming you have full coverage insurance) will only give you what your car is worth at the current market value. They will not cover any balance that you may still owe. At that point, if you owe a substantial amount, you could be paying on a car you can’t even drive!

For example, say you purchased a $35,000 brand new car. Because you had stellar credit, you were able to finance the entire amount at 0% interest for 5 years. In less than a year, your new car is stolen off your property and is never to be found again. Because of depreciation, your car is said to be worth $24,500 at the current market value. With a $500 comprehensive deductible, your total insurance payout for your claim would be $24,000. But what happens when you still owe $28,000 on your auto loan? That means you have to come up with $4,000 out of pocket!

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Fortunately, GAP insurance works to relieve you of having to pay any extra out of pocket costs. With GAP insurance, it would supplement your insurance payout from the claim and cover the extra $4,000 that you owe, so you are out of the loan free and clear without having to pay any substantial amount.

What Situations Should You Consider GAP Insurance

You may want to consider a GAP Insurance policy if you meet any of these criteria:

  • You are considering to lease a vehicle.
  • Your loan has high interest.
  • You have little to no down payment.
  • You have negative equity from your trade-in that has been transferred into your new car loan.

Find an Insurance Provider to Meet Your Needs

GAP insurance is relatively inexpensive when compared to the cost of comprehensive or collision insurance costs. GAP insurance rates fall at about 5 to 6% of your total premium. It is important to note that GAP insurance, in most cases, is only available to those who have purchased both collision and comprehensive coverage.

One of the most important things to remember is to not buy GAP insurance from the car dealership.

They will most likely offer you the option to purchase GAP insurance, but at a high rate. Not to mention, the premium is lumped into your loan amount, so you will be paying interest rates on top of your premium.

Most insurance companies offer GAP insurance coverage that can be purchased independently from a car dealership and at a much lower price. If you are undecided about purchasing GAP insurance, most companies offer the option to add it later as well.

GAP insurance is not always the first thing you may think about when purchasing a vehicle, but it pays to have it when in a serious auto accident or in the event that your vehicle is stolen. It is important to shop around and find what company has the best rates and will meet your specific needs. Comparing car insurance rates now by entering your zip code in our FREE tool below!

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