GAP insurance
GAP insurance, or Guaranteed Auto Protection, is a specialized insurance product designed to protect vehicle owners from financial loss if their vehicle is totaled or stolen shortly after purchase. It covers the gap between the amount owed on a car loan and what the standard insurance payout would be, which is particularly important given that vehicles depreciate rapidly—an average new car can lose up to 20% of its value within the first year. This insurance is especially beneficial for those who finance vehicles with low down payments, lease their cars, or acquire vehicles that are known to depreciate quickly.
Common misconceptions about GAP insurance include beliefs that it covers payment difficulties due to unemployment or illness, costs of vehicle repairs, or rental vehicles. In reality, its sole purpose is to safeguard against the financial burden of owing more than a car is worth in the event of an accident or theft. Lenders may require GAP insurance for certain loans, and while it can be purchased through dealerships, it is often more cost-effective to buy it from independent insurers. Regularly reviewing the necessity of GAP insurance as the loan progresses can help owners determine when it is appropriate to discontinue coverage.
Subject Terms
GAP insurance
GAP insurance, or guaranteed auto protection, is insurance that can be purchased with a new vehicle to protect the buyer in the event the vehicle is damaged or stolen during the early part of the loan. It covers the difference between the vehicle's value and the amount that insurance pays if the vehicle is determined to be a total loss after an accident or theft. A number of factors need to be considered in determining if GAP insurance is a worthwhile purchase; however, some lenders require it as part of the terms of the loan.
Background
Also known as totaled insurance, GAP insurance protects someone who purchases a new vehicle if the vehicle is "totaled," or damaged beyond repair, in an accident shortly after purchase. It also helps if the vehicle is stolen. GAP insurance covers the difference between what the regular insurance policy pays on the vehicle and the amount still owed on the loan.
GAP insurance can be important because vehicles depreciate, or lose value, rather quickly. It is estimated the average new car depreciates by 11 percent as soon as it is driven off the dealer's lot. Within a year, it loses 20 percent of its value. This means if someone pays $25,000 for a car, it is only worth about $22,250 as soon as it is driven home. Within a year, it is only worth $20,000.
However, the owner has likely not made enough payments on the car in that time to reduce the loan to those amounts. This means that if the car is totaled or stolen before it has been owned for a year, the car insurance company will pay $20,000, but the car owner may still owe several thousand dollars more on the loan. The owner will still have to pay that amount on the loan even though the car is gone. This can be a particular issue when the owner also needs funds to purchase a new car. GAP insurance covers this difference, so that the owner has the full amount of money needed to pay off the loan on the vehicle. This insurance applies to cars and to other vehicles, such as trucks, motor homes, etc.
Misconceptions and Considerations
People often misunderstand what GAP insurance covers. Some mistakenly believe it covers a person anytime they are unable to make a car payment for any reason. This is not the case. GAP insurance does not cover instances where a person cannot make a payment because of illness or unemployment. It does not provide reimbursement for vehicle repairs or the cost of a rental car while the primary vehicle is in the repair shop. GAP insurance will not help if a vehicle is repossessed, and it does not cover the cost of any extended warranties taken out on the vehicle.
The sole purpose of GAP insurance is to protect owners from the effects of depreciation should their vehicle be destroyed or stolen in the first few years of the loan. Once enough of the loan is paid so the amount to be paid is less than the car's value, GAP insurance is no longer needed and can be discontinued. How long this takes depends on a number of factors, including the type of vehicle (some hold their value better than others), how much of a down payment was made (this reduces the amount of the loan), and whether the person has enough funds on hand to pay off the loan without GAP insurance.
Some lenders require new car buyers or leasers to purchase GAP coverage. Most car dealers sell GAP insurance, but experts say it is generally more expensive than insurance that can be purchased through an independent car insurance company. This coverage should be reviewed periodically to determine when the car's value has dropped below the amount that remains to be financed; at that point, the insurance can be discontinued. Resources such as Kelley Blue Book and the National Automobile Dealers Association (NADA) can help car owners determine the value of their vehicle and decide when GAP coverage is no longer necessary.
Experts offer some recommendations for who should purchase GAP insurance. It is recommended for leased vehicles, for vehicles that are financed for more than sixty months, and for car owners who made less than a 20 percent down payment at purchase. It would also be a good idea for owners of vehicles that lose value quickly.
If someone has not purchased GAP coverage and experiences the loss of a vehicle when the remaining loan exceeds the vehicle's value, there are two main options. The person can pay off the remainder of the loan from personal funds or savings, or they can roll the amount still owed into the loan for a new vehicle. If a person chooses this option, experts recommend GAP insurance, since it will take even longer to reduce the financed amount below the vehicle's value.
Consumer protection bureaus recommend that people who are told that they must purchase GAP insurance as a requirement of financing review the paperwork carefully to determine if it is really necessary. Even if it is, they recommend purchasing it from the insurer providing the collision and liability coverage on the car or another insurer, since prices can vary. GAP insurance typically costs about 5 to 6 percent of the cost of collision insurance on the vehicle. For a policy that costs $1,000 a year, the GAP policy would add about $50 to $60 per year for the first few years.
Bibliography
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Steinisch, Monica. "GAP Insurance for Your Car: Do You Need It?" Nolo.com, 30 Aug. 2024, www.nolo.com/legal-encyclopedia/gap-insurance-car-do-you-30132.html. Accessed 27 Dec. 2024.
Vallet, Mark. "Gap Insurance: What Does It Cover and Is It Worth It?" Car Insurance, 15 Oct. 2024, www.carinsurance.com/gap-insurance.aspx. Accessed 27 Dec. 2024.
"What Is Gap Insurance?" Insurance Information Institute, www.iii.org/article/what-gap-insurance. Accessed 27 Dec. 2024.
"What Is Gap Insurance and How Does It Work?" Allstate, July 2024, www.allstate.com/resources/car-insurance/gap-insurance-coverage. Accessed 27 Dec. 2024.
"What Is Guaranteed Auto Protection (GAP) Insurance?" Consumer Financial Protection Bureau, 8 Mar. 2024, www.consumerfinance.gov/askcfpb/797/my-dealer-offered-me-guaranteed-auto-protection-gap-insurance-what-it.html. Accessed 27 Dec. 2024.