You would probably hear about Guaranteed Asset Protection (GAP) or someone will try to sell it to you when you are buying a vehicle with credit. It only comes into picture if you are upside down on an auto loan. GAP insurance is there to pay off the outstanding car loan in case your automobile is totaled or stolen and you don’t receive enough money from the insurer. So, it can be a good coverage to have or it may not be worth spending money, especially the chance of being upside-down on the debt is low. Let’s have a look at what it is, who needs it and where to buy it.
Guaranteed Asset Protection is a specialized indemnity product for drivers who may have difficulty in paying off finance if the vehicle used as collateral is totaled or stolen. Some drivers may find this extra safety for their loan assuring and it may be worthless for others. At times, it may be required by the lender or lessor anyway that you may not have a choice.
Generally, new automobiles lose value the moment they leave the showroom. This creates a problem for drivers who have financed their new ride because auto insurance companies would only pay out the cash value of a totalled vehicle. Therefore, you may need it to meet the difference between the outstanding balance on the loan or lease contract and the actual cash value payable by the insurer. It doesn’t have any other provision.
A typical full coverage car insurance would only compensate for the depreciated value of the automobile and doesn’t take how much you owe to the lender into account.
Particularly in the early years cars depreciate in value fast and this creates a concern. That is why there is a specific cover to discharge an outstanding debt fully that can be added onto typical auto insurance policies for a small additional premium or bought from other sources like the auto dealer, bank or credit union.
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 vehicle insurer would only pay its current value of $20,000 (minus deductible) and the shortfall of $4,000 would be paid by GAP insurance. However, you would have to pay the $4,000 out of pocket if you didn’t have GAP insurance to be discharged from the loan agreement.
Generally, Gap insurance costs between $20 – $60 depending on the insurer, vehicle’s value and your driving records. So, if you have a loan, it may not be much to pay for extra peace of mind. Still, you won’t receive any benefit from it when the value of your auto matches or more than the outstanding loan and your policy settles the debt in full if something happens to your car. So, you may feel you don’t need it.
Who May Need to Get GAP Car 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 the worst-case scenario of losing the car and not getting paid enough by insurance. 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 having to pay the outstanding loan out of pocket if the vehicle is stolen or totaled and insurance payout isn’t enough to discharge the loan. There is a high chance you will still owe money and need to deal with it even though you lost the vehicle.
- Buying an automobile that is known to depreciate fast would increase the chance of going under with borrowing quickly.
- Driving a few thousand miles a year will quickly rack mileage and that will reduce the value of an auto faster.
- Longer finance terms (five years or over) generally delays capital reduction 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 it 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, a dealer would try to squeeze in a few upsells from upgraded seats to extended warranties. One of those common upsells is this loan protection. But is it worth it when you use credit?
Usually, you are not obligated to have GAP insurance. Not all lenders require it and it is not part of state law minimum insurance requirements. But it may be required by lease agreements.
It is worthless if the car is a cash purchase since you have nothing to worry about. Also, putting a large sum down (20% or over) would reduce any risk of having an upside down debt. Furthermore, if a small chance of being slightly short on a loan wouldn’t worry you financially you may be more relaxed about having it or not. After all, it only comes into play if it is upside down and your vehicle is a total loss.
Where to Buy GAP Insurance?
The amount of money you spend on this can make it worthwhile or too expensive. Car dealers are known to make money selling standalone GAP coverage. They usually charge a lump sum for it and offer to add it to the borrowing that makes it even more expensive due to interest charged on it. Removing this middleman and going to a typical insurer can save you money.
You can purchase GAP insurance from an insurer, lender or dealer. However, there is bound to be a price difference. According to the III, it would cost about $20 per annum on average to add it to your auto insurance policy. But it may cost a lot more 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 know that you have options.
If you are not careful, a useful product can turn into an exorbitant expense. You always need to consider costs and possible return on it. Most insurance products make sense when there is a chance of 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 a 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 this coverage from your automobile insurance company is that you can drop it whenever you want. You don’t need to contact a dealer or lender and wait for a response. However, not every insurer offers GAP coverage and some companies may call it something different. For example, Progressive calls it loan/lease payoff coverage.