Understanding GAP Insurance: Protecting Your Investment
What is GAP insurance?
Guaranteed Asset Protection (GAP insurance) insurance coverage renders is a special insurance that covers the difference between what you owe on the vehicle versus what you vehicle is worth after a accident if the accident is a total loss.
An example of when GAP insurance is worth it
You buy a new $27,000 vehicle, put down a $2,000 down-payment and take out a car loan for the balance. You drive it for 2-year, putting on about 35,000 miles. You get into a major accident and the insurance adjusters call it a total loss and pay you what the vehicle is worth.
Since most vehicles depreciate the fastest in the first two years after purchase and since you have a bit more than normal mileage, your vehicle is worth far less than you still owe on it.
If you don’t have GAP insurance, you will get the money from the insurance company for the value of the vehicle, but you’ll still have to pay off the balance of the car loan. Even if you apply the full payout from the accident towards the loan balance, you’ll still be short. So you won’t have a vehicle and you’ll still be making car payments on the excess balance.
Who should buy GAP?
If you’re putting down a small down-payment and taking out a car loan for the balance, you should purchase GAP.
Where to buy GAP?
The dealer will try hard to sell you GAP insurance. But you don’t have to buy it from them. Contact your car lender or your car insurance company and ask if they offer it. Get a quote and compare the quote with other insurance providers. In most cases, you’ll pay less for this insurance if you don’t buy it from the dealer.
When does gap insurance not pay?
The purpose of this type of insurance is to protect you in only one scenario: when you owe more on your loan or lease than the car is worth. If you put down a large down payment, you really don’t need it. If you put down a small downpayment, drive the car, get into an accident that totals the car, you’ll owe more than your instance will pay you. In that case, this insurance is worth it.
Keep in mind that gap insurance only covers the difference between what your insurance company pays you and what you owe the bank/lender. GAP insurance does not pay for:
Injuries
Repairs to your vehicle
A new car
Damage to someone else’s vehicle
Negative equity you rolled over from a previous loan
Cost of optional products such as vehicle service contracts
In addition, even with GAP insurance, you may still owe additional charges related to your loan or lease agreement, such as excess mileage charges, may not be covered either. Note that you won’t receive a payout from your gap insurance if you don’t owe more than the car’s worth.
©, 2022 Rick Muscoplat
Posted on by Rick Muscoplat