You would probably hear about Guaranteed Auto Protection (GAP) or someone will try to sell it to you when you are buying a vehicle with loan. GAP car insurance only comes into picture if you are upside down on your auto loan. It is there to pay off your debt in case your automobile is totaled and you don’t receive enough money from your insurer. So, it can be a good coverage to have providing it is reasonably priced. Or it may not be worth spending money, especially the chance of being upside-down is low. Let’s have a look at what it is, who needs it and where to buy.
GAP insurance is a specialized indemnity product for drivers who may have difficulty in paying off their finance if the vehicle used as collateral is totaled or stolen. It is in a way a debt cancellation agreement. Some drivers may find this extra protection for their credit assuring and it may be worthless for others.
Generally, new automobiles lose their value the moment they live the salesroom. This creates a problem for drivers who have financed their new ride because insurers would only pay for the cash value of a totalled vehicle. Therefore, you may need GAP automobile insurance to pay for the difference between the outstanding balance on the loan or lease contract and the actual cash value payable by your carrier. It doesn’t have any other provision.
A typical full coverage vehicle insurance policy would only pay for actual cash value, which is the fair market value of the (now) used automobile. The idea is to avoid making people better off with a claim settlement in an effort to prevent moral hazard. It has nothing to do with your credit arrangements.
Particularly in the early years cars depreciate in value fast and this creates a concern. That is why there is a specific gap cover to pay off an outstanding debt fully that can be added onto typical auto policies for a small additional premium.
Say you bought a $30,000 auto and it is now worth only $20,000 but you still owe $24,000 on it. If it is wrecked or stolen, your carrier would only pay you its current value of $20,000 (minus deductible) and the shortfall of $4,000 would be paid by GAP protection. In this scenario, you wouldn’t lose. However, you would have to pay the $4,000 out of pocket if you didn’t have the cover.
As you can see there are several “if”s in the above example and you need to take the cost of such policy addition into account too. You may also pay the premium and nothing happens to your car or your standard policy pays enough to settle the debt.
Who May Need to Get GAP Vehicle Insurance?
It is another form of insurance and you should consider it when you don’t have enough resources to deal with an outstanding debt in worst-case scenario of losing your car. You may be well served by such a cover under following circumstances.
- Getting finance with hardly any down payment would certainly put you at risk of being short-changed if something happens. There is high chance you will still owe money and need to pay it back even though you lost your auto.
- Buying an automobile that is known to depreciate fast would increase the chance of going under with your borrowing quickly.
- Driving a few thousand miles a year will quickly rack mileage and that will reduce the value of your auto faster.
- Longer finance terms (five years or over) are generally front-loaded with interest that delays capital payment and therefore sends you upside down quickly.
- You will probably need it if you are leasing a vehicle. However, leasing companies are known to arrange the cover themselves and include the costs in the contract. So, you’d better check first before spending money.
When GAP Coverage May Be Waste of Money?
When you are buying a car your dealer would try to squeeze in a few upsells from upgraded seats to extended warranties. One of those common upsells is this loan protection and it is a pretty lucrative one for dealerships. But is it worth to get GAP policy when you use credit?
Usually, you are not obligated to buy GAP coverage. It is not part of lending, insurance or state law requirements. But it may be required by lease agreements.
It is worthless if you are paying cash for your car purchase since you have no debt to worry about. Also, paying large down payments (20% or over) will almost eliminate any risk. Furthermore, if a small chance of being slightly short on your loan wouldn’t worry you financially you may consider taking a chance with it. After all, it only pays if your loan is upside down and your vehicle is a total loss.
Where to Buy Gap Insurance?
The amount of money you spend on this coverage can make it worthwhile or too expensive. Car dealers are known to make a lot of money selling standalone protection that can be added to a typical auto policy. They may have lucrative deals with some unknown insurers that allow them to take as much as 50% commissions on already expensive policies. They usually charge a lump sum for it and offer to add it to the loan that makes it even more expensive due to interest charged on it. Removing this middleman and going to a typical insurer can save you a lot of money.
You can purchase your gap car insurance from your insurer, lender, or dealer. However, the price difference can be huge. According to the Insurance Information Institute, GAP coverage would cost about $20 per annum on average. But it may cost up to $700 if you buy it from a lender or car dealer, according to United Policyholders. So watch out when you are buying a vehicle or getting a loan for it and don’t get cornered.
If you are not careful a useful product can turn into exorbitant expense. You always need to consider costs and possible return on it. Most insurance products only make sense when they cover possible large losses with relatively affordable premiums. Try to answer the question of do I need this policy, in the light of above conditions and its cost.
Also, people who have already paid a lump sum premium for this especially through their lenders or dealers may be able to get GAP insurance refund if they don’t need or want it anymore. It may be void under certain circumstances anyway, like refinancing the loan or replacing the car that is used as collateral.
As well as being much cheaper and not needing a lump sum payment, another advantage of buying GAP coverage from your insurer is that you can drop it whenever you want. You don’t need to contact a dealer or lender and wait for their response.