A moving vehicle isn’t hardly enough security for a finance company unless it has good insurance to pay for damages it may suffer. The second concern is the fact that a car loan may be upside down very quickly and Guaranteed Asset Protection (GAP) insurance is a solution to address this concern. A finance or leasing company normally requires full coverage auto insurance plus GAP insurance to protect their investments.
Collision and Comprehensive coverages pay to repair or replace a vehicle if it is damaged in a collision, fire, acts of nature or gets stolen. However, a standard vehicle insurance policy would only pay the current value of the vehicle if it is totaled and this may not be enough to pay off the loan. In such cases, GAP insurance comes into play to pay for the difference between what you owe to your lender and what you get paid from your insurer for a totaled car.
Insurance provides additional security for lienholders or lessors and in a way makes it possible for them to enter into contracts. The borrower is naturally responsible for the debt but often insurance ends up paying for the damages and even the outstanding debt with the above arrangement.
You have full flexibility when you own an automobile outright. You can decide to arrange as much protection as you like, except the legally required minimum liability. When you take a loan on the car or lease it from a third party you will need to buy a sufficient policy to comply with their requirements, including GAP insurance coverage.
When GAP Insurance might be needed?
This coverage is normally required by your lender or lessor and it is a good idea to consider buying GAP insurance in the following circumstance;
- GAP insurance is generally required for a leased automobile.
- You put down less than a 20% down payment. This increases the chances of being upside down on your loan and facing the risk of still needing to pay the outstanding loan if your auto is totaled or stolen.
- You arranged finance longer than 60 months. The longer it takes to pay off your loan the higher the likelihood that your vehicle’s depreciation will outrun your capital payments on your loan.
- You bought a vehicle that depreciates faster. The more exotic and rare your vehicle is, the higher chance it loses its value faster than a typical car that always has a good resale value.
- You started with negative equity because you rolled over your old car loan into the new loan.
Where can you buy gap insurance?
Leasing companies may already include gap coverage cost within the lease payments. You need to check this to determine if you need it or not. Also, auto dealers may offer GAP insurance that can be added onto your loan, which would mean that you pay interest on the GAP insurance as well.
Your car dealer may offer to sell you gap insurance on your new vehicle. However, most car insurers also offer it, and they typically charge less than the dealer. Including gap insurance with collision and comprehensive auto insurance coverage adds only about $20 – $60 to the annual premium. Yes, GAP insurance premiums are affected by your driving records.
Auto loan contracts usually have insurance conditions and they require full coverage car insurance plus GAP insurance in most cases. A leased car belongs to the company. An auto bought with finance will be the underlying security for the lender. That is why they like it to be protected against most losses.
Essentially, they like to be paid back if the auto is stolen or totally wrecked as well as other damages it suffers. Therefore, comprehensive and collision coverage will be required to compensate them in case of any damages to their asset or security. Since you are the beneficiary of these contracts you will be paying for the premiums in due course.
In the early years, the car’s value will be depreciating really fast while the outstanding loan balance is not going down much. Especially when the initial administration costs are added to it too. This difference between the open market value of an automobile and the outstanding debt can be there for several years.
To deal with this shortfall in case the vehicle is totalled or stolen, you may need to buy GAP vehicle insurance. When you insure your vehicle for collision and comprehensive coverages, you will be paid the actual cash value of your automobile at the time if they get totaled or stolen, which may not be enough to pay off your auto loan. When you buy GAP coverage, any shortfall between the insurance settlement and outstanding loan will be covered by it to release you from your loan or lease obligations.