Automobile values depreciate fast in the early years and most lose at least twenty percent of their value in the first year alone. A standard auto insurance policy insures a vehicle’s depreciated value and only pays its current value even if it is totalled. This creates a problem if you took out a loan with a small deposit as the value of your car can quickly go below the outstanding loan. That is why motorists with a car loan may need Guaranteed Asset Protection (GAP) insurance, which covers the difference between what you would get from your auto insurance if your vehicle was totaled or stolen and the outstanding loan at the time.
The moment you drive a brand new automobile off the dealer’s lot it becomes used and generally believed to lose ten percent of its value. If you borrow to purchase it, your down payment may already be wiped off by its depreciation. Considering that most people add the arrangement fees and taxes on top as well, suddenly the loan would be upside down.
If something happens to the auto and it is totaled the carrier only pays its market value at the time of the accident. However, this Actual Cash Value isn’t enough for an upside down loan. Similar logic applies to leased cars too.
For example, you have full coverage auto insurance and your vehicle’s current depreciated value is $10,000. Your auto insurer will only pay you this amount minus deductible if your auto is totaled or stolen. If you still have $14,000 outstanding on your car loan, your GAP insurance will pay the difference of $4,000 so that you can be released from your loan contract. Without GAP, you will need to pay the difference out of pocket.
Gap auto insurance only pays for the shortfall between depreciated value of the vehicle and outstanding loan on it in the above described circumstances. That is why it is also known as loan-lease payoff coverage. It is never blanket coverage for installments, repairs, diminished values and cannot help if the car is repossessed. It has a very specific purpose and it only kicks in certain circumstances.
Still it can be valuable, especially in the early years. Otherwise, you may end up in a difficult situation in which you still have an outstanding debt even though the car is gone. That would mean that you would still have to come up with this money. Furthermore, you would find it hard to arrange finance for another vehicle while you have an outstanding debt to settle.
When to Buy GAP Coverage?
It has a specific purpose. It has no value if you don’t have a debt. Here are a few points to explain who should (or can) buy it.
- You usually need to have a typical finance agreement in place from a regulated and accepted lender. Borrowing money from parents or a bank without offering the vehicle as collateral doesn’t count as auto finance.
- You can buy it to cover new and used financed automobiles.
- Terms and conditions of each provider may be different. However, you can usually purchase it within 12 months of purchasing, leasing, refinancing the latest model or used cars, trucks and SUV’s.
- It is useful when you are either upside down or there is a chance you will be.
- But you probably don’t need it if you put down a substantial deposit when you bought the auto.
- You certainly don’t need it when you purchase a vehicle outright. Also, you should be able to cancel it when you paid off the loan.
- It is probably best to arrange it at the same time as arranging a regular policy. This would probably be the cheapest option as the insurer can add this easily and cheaply.
- You are normally free to choose the provider. If you are contractually required, you can buy it from whichever source you choose as long as you comply with the requirements.
- If you bought it from an insurer you won’t lose it even if you didn’t make the loan payments in time as long as you don’t miss the premium. However, late penalties won’t be considered as part of it in the event your insurer settles a claim.
- If you want to buy it from an automobile insurance company, they won’t usually sell GAP insurance without Collision and Comprehensive coverages on your policy.
What to Watch Out With GAP Vehicle Insurance
Here are a few points to know.
- It doesn’t have deductibles.
- It isn’t required by state laws.
- But it is usually required by lenders.
- You should check what you sign and go over the itemized bill when you are buying a car or signing a loan as GAP insurance and its costs may have been automatically included. In such cases, you can refuse it and buy from another source. Most state laws require dealers and financial institutions to itemize the costs.
- If you are charged for it and you didn’t realize you may be able cancel it and ask for a refund. If it was charged as a yearly premium at the start you can demand a refund. If it is being charged monthly and collected with a loan payment, you can ask them to take it out and recalculate the monthly payment.
How Much Does GAP Insurance Cost?
The premium difference can be noticeable depending on who sells it. If you purchase it from a carrier, it usually costs about $20 – $60 a year, according to the III. Most insurers sell it although it may come under a different name.
According to a non-profit consumer group United Policyholders, buying this policy from lenders, auto leasing companies and dealers can cost you substantially more than if you buy it from an insurer.
Can I Buy GAP coverage without Car Insurance?
Dealers can probably sell you a stand-alone Guaranteed Asset Protection. Typical insurers wouldn’t normally sell GAP without collision and comprehensive coverage and without them you have no means of getting compensated for your vehicle damages. You will probably have to purchase a full automobile insurance policy anyway because lienholders will require it when you have a loan.
What Is a Gap Waiver?
Gap Waiver is an addendum you can add to your auto loan or lease. It is a debt cancellation agreement, which releases you from paying the difference between what you would receive from your insurance in case the vehicle is totaled or stolen and what you owe to your lender at the time.