What Is Gap Insurance?

It stands for Guaranteed Auto (or Asset) Protection. Owners often confuse it as insurance for loan payments or even the vehicle. It is usually bought for upside down car debt. What it is and what it isn’t discussed in detail below.

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 it 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, if you have the provision. However, this Actual Cash Value isn’t enough for an upside down loan. Similar logic applies to leased cars too.

Gap protection is often referred to as insurance but it is actually a debt cancellation agreement that is designed to meet the difference between auto value and its loan. 

What Does GAP Insurance Cover?

You probably already appreciate the need for some sort of protection when it is clear that you will be shortchanged and not have enough money to clear the finance. It meets this shortage as they are designed to provide the additional money, the disparity between what is outstanding and what you would get if it was totaled. So, it would furnish you with sufficient funds should the carrier decides to write off the vehicle.

Gap auto insurance only pays for the hole between fair open market value of the vehicle and outstanding loan on it. It is neither payment guarantee nor coverage for vehicle damages.

It isn’t a super solution to fill the voids. 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.

Guaranteed Auto Protection only pays for the difference, in the event of a total insured loss, between what is outstanding on a car finance and what it is worth. That’s it and that is why it is also known as loan-lease payoff coverage.

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.

  1. 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.
  2. You can buy it for new and used financed automobiles.
  3. Terms and conditions of each provider may be different. However, you can usually purchase it within 12 months of purchasing, leasing, refinancing latest model or used cars, trucks and SUV’s.
  4. It is useful when you are either upside down or there is a chance you will be.
  5. But you probably don’t need it if you put down substantial deposit when you bought the auto.
  6. You certainly don’t need it when you purchase a vehicle outright. Also, you should be able to cancel it when you are finished with the borrowing.
  7. 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.
  8. You should be able to choose the provider. Dealers and lenders may also suggest that you have to buy this from them. This isn’t true. If you are required you can buy it from whichever source you choose as long as you comply with the requirements.
  9. A lender won’t probably release the funds without the confirmation of this but it is also true for full coverage. So, you don’t have extra pressure on.
  10. 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 the provider settles a claim.

What to Watch Out With GAP Vehicle Insurance

Here are a few points to know.

  1. It doesn’t have deductibles
  2. Also, some policies may have collision or comprehensive deductibles in relation to the incident that led to total loss. But not all policies come with this provision.
  3. It isn’t required by state laws.
  4. But it is usually required by lenders.
  5. It is a contractual agreement and if you dropped it the company can buy this and charge the premium to you.
  6. One of the problems with this cover is that some lenders or dealers may try to sneak it in while they are arranging the paperwork. You should check what you sign and go over the itemized bill. Most state laws require dealers and financial institutions to itemize the costs.
  7. 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 together you can ask them to take it out and recalculate the monthly payment.

How Much Does GAP Insurance Cost?

The premium difference can be huge depending on who sells it. If you purchase it from a carrier, it usually costs about $20 a year, according to the III. Most of them sell it and some may include it automatically when you buy a full coverage even if you didn’t ask for it.

Dealerships and lenders may try to take advantage of lack of knowledge and sell you a stand-alone protection at extortionate costs. According to a non-profit consumer group United Policyholders, buying this policy from lenders, auto leasing companies and dealers can cost you between $500 and $700 per annum.

You should always get quotes for it from typical carriers. Otherwise, you may spend an arm and a leg for something that should cost peanuts.

Can I Buy GAP without Car Insurance?

Technically, the answer is yes and dealers can probably sell you a stand-alone Guaranteed Asset Protection. Nevertheless, you will probably have to purchase full policy anyway because lienholders will require it. In any case, you need to purchase minimum liability too.

Typical carriers wouldn’t sell Guaranteed Auto Protection without collision and comprehensive and without them you have no means of paying off your borrowing anyway that it is pointless to worry about the shortfall.

What Is a Gap Waiver?

It is an agreement in which the creditor waives the debtor or lessee’s obligation to settle the amount between the outstanding debt and actual cash value of an asset. This is usually seen when a leasing company arranges it and adds the cost within the charges.