Suppose you have an auto loan or lease a new vehicle. In that case, you should add GAP insurance (Guaranteed Asset Protection) to your car insurance policy.
Suppose your car is totaled in an accident or stolen and not recovered. In that case, your auto insurance will pay you based on the vehicle’s actual cash value (ACV), which may be way lower than what you paid for it due to depreciation.
You will be left owing more on your loan or lease than what your insurance will pay for. GAP insurance will cover the gap. You won’t have to pay out of pocket for the remaining balance.
What is GAP Insurance?
GAP stands for Guaranteed Asset Protection. GAP insurance is an optional coverage that pays for the difference between what a vehicle is worth and what a person still owes on a loan or lease agreement. To understand what it’s for, you need to know how fast a new car depreciates once it’s driven off the lot.
New cars depreciate big time, often losing up to 20% of their value in the first year. So early in a loan or lease term, the outstanding balance may be more than the vehicle’s actual cash value (ACV).
Suppose the car is totaled in an accident. In that case, standard auto insurance covers only the car’s market value, not the full amount owed on the loan. This leaves the borrower exposed, as they may still be responsible for the remaining loan balance.
GAP insurance fills this gap by covering the difference between the insurance payout and the remaining loan balance. So the borrower doesn’t have to keep making payments on a car that’s no longer usable and is protected against unexpected losses.
GAP coverage also has applications for vehicle repairs, theft, or any major accident that results in significant damage. A GAP insurance policy isn’t mandatory coverage for drivers. However, it’s ideal for drivers who have leased or loaned cars. The last thing anyone wants is to continue putting money towards a car they can’t even drive anymore.
Is GAP Insurance Worth it?
New vehicles depreciate so fast that GAP insurance coverage can be a good addition, especially if you have a low down payment or long-term loan.
Without it, a totaled car will leave the owner responsible for the remaining balance of the loan if the car is totaled.
Standard insurance only covers the actual cash value (ACV) of the vehicle. GAP coverage bridges the gap between what’s owed and what the insurance will pay out. It gives you financial security and peace of mind and protects against significant out-of-pocket costs.
When you buy insurance for your vehicle, you have to choose which type of auto insurance coverage, basic or full coverage. Basic coverage is just the state minimum liability coverage and full coverage is liability, comprehensive, and collision coverage.
Although not required by law, comprehensive and collision coverage, lenders and leasing companies require it so that the vehicle loan or lease can be paid off even if the car is totaled.
How Does Guaranteed Asset Protection Work?
GAP insurance is designed to protect you when your vehicle’s value falls below the amount you still owe on it and is declared a total loss. It stops financial hardship by covering the difference between what your insurance pays and your outstanding loan balance.
A totaled vehicle with an outstanding loan can put you in a tough spot, leaving you to pay off the debt and replace your car. This is especially common when:
- You put down a small down payment—smaller down payments mean you’ll likely owe more than the car is worth.
- Your loan term is long, and your balance decreases slowly while depreciation continues.
- Your vehicle depreciates fast—some models lose value much quicker than others.
GAP insurance is essential if you recently bought or leased a vehicle. For example, imagine buying a car with a sale price of $35,000 with only a $3,000 down payment, leaving you with a $32,000 loan.
Within a year, the car depreciated 25% and is now worth $26,250.
If the car is totaled, your insurance provider will only pay out the current market value minus your deductible, leaving you with a $5,750 shortfall. GAP insurance will cover that gap in the loan or lease payoff.
Consider leasing a vehicle for $25,000 on a 4-year term. After the first year, the car’s value drops to $18,500, but you still owe $21,000 on the lease.
If the vehicle is totaled, your standard insurance will only pay out $18,500, leaving a $2,500 gap that GAP insurance will cover. Some GAP policies may also include coverage for your car insurance deductible, though this is not always guaranteed.
By eliminating these unexpected costs, GAP insurance means you won’t be left paying off a loan or lease on a car you no longer have.
Guaranteed Asset Protection provides financial protection against depreciation and peace of mind so you can focus on replacing your vehicle instead of dealing with a big financial hit.
What Does GAP Insurance Cover?
GAP insurance kicks in when your vehicle is stolen or declared a total loss due to an accident. A car is considered a total loss when the cost of repairs exceeds its actual cash value (ACV), which an insurance adjuster determines.
In those cases, your collision or comprehensive coverage will pay out the ACV of the vehicle minus your deductible instead of paying for repairs because fixing the car wouldn’t be worth it.
GAP insurance covers the difference between your vehicle’s ACV and the remaining loan or lease balance. But if your GAP policy has a coverage limit, it might only cover part of the balance if you owe much more than the car is worth. Also, GAP insurance doesn’t cover extra charges on your loan, like finance fees or mileage penalties.
Another time GAP insurance is applicable is if your vehicle is stolen and never recovered. In that case, your insurance company will pay out the ACV of the car, and you’ll be responsible for the remaining lease or loan balance. For those leasing a car, that means making monthly payments on a vehicle they no longer have – a situation where GAP insurance will protect you.
Ultimately, GAP insurance is not just about protecting against vehicle losses; it’s about protecting you from ongoing financial obligations like lease or loan payments on a car you can no longer drive. However, GAP insurance does not cover bodily injuries, property damage, medical expenses, lost wages, or funeral costs.
What does GAP Insurance Not Cover?
GAP insurance is used to cover the difference (or GAP) between the actual cash value of the car and the current balance of the auto loan payments. For this reason, it’s often purchased by drivers with leased vehicles. You’ll find that GAP insurance can go hand in hand with cars of this nature.
Guaranteed Asset Protection doesn’t provide insurance coverage for the situations listed below.
- Unpaid payments towards a car lease or loan.
- Fees and Finance charges on a lease or loan.
- Any insurance or extended warranties bought with the lease.
- Balances from previous loans.
- Lease penalties.
- Security deposits.
- Old age and prior damage.
- Additional features and equipment.
- Mechanical or interior issues.
When Do I Need GAP Insurance?
Drivers should always carry GAP insurance for financed or leased cars. Drivers who own their vehicles would only get a little use out of them since there are no car or GAP payments they have to keep up with.
If there is a big gap between your car’s value and how much you owe on it, loan GAP insurance can be a lifesaver. You might want to consider Guaranteed Asset Protection coverage in the following situations:
- You’re leasing a car: Many leasing companies require GAP insurance to cover the remaining lease balance in case of a total loss.
- You put a small down payment on a new car: If your down payment is less than 20% of the purchase price, you could be underwater in the car immediately. This isn’t limited to new vehicles; GAP insurance for used cars can protect against being underwater, too.
- You have an extended loan term: The longer your loan, the slower your loan balance goes down, the more likely you are to owe more than the car is worth.
- You want to guard against depreciation: Some cars depreciate faster than others. Research your car’s depreciation rate to see if GAP insurance is necessary.
- You have a loan rollover: If you carried debt over from a previous car loan into your new loan, you may already owe more than the car is worth. GAP insurance can help protect against the financial pain of being underwater.
How Much Does GAP Insurance Cost?
The cost of GAP Insurance depends on many factors, including which type of company you buy it from.
Dealerships will charge around $60 a month or a one-time fee of $500 to $700 a year for GAP insurance. But if you buy GAP through a dealership and include it in your auto loan, you’ll be paying interest on the insurance, too.
If you get your vehicle loan through a bank or credit union, they may be able to offer you GAP coverage.
A better option is to add GAP to your existing auto insurance policy, which will cost between $20 to $40 a month, much cheaper than dealer rates.
Be sure to cancel GAP insurance when your loan balance reaches or goes below your vehicle’s fair market value.
Is GAP insurance worth it? Well, that depends on your vehicle’s actual cash value, depreciation rate, and the amount left on your loan. For most new car buyers, GAP insurance is an affordable and valuable safety net against financial loss.
How Can I Buy GAP Insurance?
When buying or leasing a car, you have three options for buying GAP insurance:
- Through the dealer at the time of purchase or financing – Convenient but often more expensive since the GAP coverage is added to your loan or lease, so you’ll pay interest on it, too.
- As an add-on to your auto insurance policy – Many auto insurers offer GAP at a lower monthly rate than the dealer, so this is the more cost-effective option.
- From a standalone GAP insurance company – Some companies offer separate GAP policies, so it is worth a look for competitive pricing.
Dealerships offer GAP for leased and financed vehicles, but buying it through your auto insurance provider is usually the more affordable way to go.
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Frequently Asked Questions
Do I Need GAP If I Have Full Coverage?
Full coverage includes comprehensive and collision coverage, but it doesn’t cover the financial hit of rapid vehicle depreciation. GAP covers the remaining balance if your car depreciates quickly. Full coverage and GAP serve different purposes but work together to mitigate various risks.
Does GAP Insurance Cover Theft?
GAP doesn’t cover theft; comprehensive coverage does. However, if your stolen vehicle is later recovered and deemed a total loss, GAP may apply. If the car is found intact and repairable, a standard auto insurance policy would handle the claim, not GAP.
Does GAP Insurance Cover Engine Failure?
No, GAP does not cover engine failure or any other mechanical repairs. It only covers a total loss due to a covered accident or theft. It helps to cover the difference between your car’s actual cash value and the remaining loan or lease balance.
If your vehicle experiences mechanical issues, you would need a manufacturer’s warranty, extended warranty, or mechanical breakdown insurance for coverage.
What If My Car Is Totaled?
Suppose your car is declared a total loss. In that case, GAP covers the difference between the balance of your loan and the payout from your auto insurance company. Without GAP, you’d have to pay the remaining balance out of pocket.
How Do I Know If I Have GAP?
Check the paperwork from your vehicle purchase or financing agreement. If unsure, contact your lender, as they should have a record if it were included. Also, review your auto policy to see if any add-ons cover loan or lease shortfalls.
How Can I Tell If I Don’t Need GAP?
Certain financial situations reduce the need for GAP. If you put down at least 20%, got a short-term loan, or purchased a car that holds its value well, your risk of owing more than the car is worth is lower. If you’re leasing and returning the vehicle at the end of the term, standard lease protections may be enough.
Does GAP Cover Accidents Where I’m At-Fault?
Yes, GAP applies even if you were at-fault for the accident. But for GAP to be used, your primary insurer must declare the vehicle a total loss. If the car is repairable, GAP does not come into play.
Is GAP Required?
GAP is not required by law, but some lenders may need it as part of your financing agreement to protect their investment. Many financial institutions do not require borrowers to carry GAP insurance.
How Long Does GAP Last?
GAP duration varies by policy. Some cover the entire loan term, others a set period, usually during the early years when your loan balance is highest.
Suppose your policy doesn’t have a fixed term. In that case, it’s a good idea to track your remaining loan balance and vehicle value to see if you still need coverage as the loan matures.
Can I Get GAP After I Purchase My Vehicle?
Whether you can get GAP after you buy your vehicle depends on the lender or insurance company. Some require you to get GAP at the time of financing; others allow you to add it later. Check with your lender or insurance company to see your options.
