What Is Gap Insurance?

GAP stands for Guaranteed Auto Protection (also known as Guaranteed Asset Protection). Vehicle owners often confuse Gap Insurance as a protection for loan payments or even as an insurance coverage for their automobiles. It is usually bought to cover upside down loans for financed cars or leased vehicles. 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 arranged a loan to purchase it your down payment may already be wiped off by its depreciation. Considering that most people add the loan arrangement fees and taxes on top as well, suddenly you would have an upside down loan.

If something happens to your auto and it is totaled your insurer only pays its market value at the time of the accident, providing you have coverage. However, this Actual Cash Value paid for totaled vehicles by insurers isn’t enough to pay back 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 cover the difference between auto value and auto loan. 

What Does Gap Insurance Cover?

You probably already appreciate the need for some sort of insurance when it is clear that you will be shortchanged by your automobile insurance policy and not have enough money to clear the finance. Gap car insurance policies meet this shortage as they are designed to provide the additional money, the disparity between your outstanding loan and what you would get from your insurer if your car was totaled. So, gap coverage would furnish you with sufficient funds to pay off your loan should your insurance carrier decides to write off the insured vehicle.

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

Gap isn’t a super coverage that fills the voids within your insurance policy or finance agreement. It is never blanket coverage for car payments, automobile repairs, diminished values after an accident and makes no payment if your 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 your car finance and what it is worth according to the terms of your insurance. That’s it and that is why it is also known as loan-lease payoff coverage.

Still it can provide a valuable cover, especially in the early years of your financed or leased car. Otherwise, you may end up in a difficult situation in which you still have an outstanding loan even though your 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?

This protection has a specific purpose. It has no value if you don’t have a loan to pay back. 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 your parents or getting a personal loan from a bank without offering the vehicle as collateral doesn’t count as auto finance. Insurers must be able to see the loan and lease contract if they want to.
  2. You can buy GAP insurance for new and used financed automobiles.
  3. Terms and conditions of each provider may be different. However, you can usually purchase this protection 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 with your loan or there is a chance you will be.
  5. But you probably don’t need it if you put down substantial down payment when you are buying your auto.
  6. You certainly don’t need it when you purchase a vehicle outright. Also, you should be able to cancel it when you pay off the finance.
  7. It is probably best to arrange it at the same time as arranging your regular vehicle insurance. This would probably be the cheapest option as the insurer can add this coverage easily and cheaply.
  8. You should be able to choose your provider. Dealers and lenders may also suggest that you have to buy this cover 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 lender’s requirements.
  9. A lender won’t probably release the funds without the confirmation of this cover but it is also true for full coverage auto insurance. So, you don’t have more pressure on you than you have for buying a regular insurance.
  10. If you bought the gap from an insurance company you won’t lose your insurance even if you didn’t make your loan payments in time as long as you pay the insurer. However, your late payment penalties won’t be considered as part of loan payment in the event your insurer needs to pay the gap.

What to Watch Out With Gap Vehicle Insurance

Here are a few points to know about loan-lease payoff coverage.

  1. Gap car insurance doesn’t have deductibles
  2. Also, some policies may pay 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 your state laws.
  4. But it is usually required by lenders.
  5. If it is required by a leasing or loan contract and you dropped it the company can buy this cover 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 gap insurance 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 with your car loan you can ask them to take it out and recalculate your monthly payment.

How Much Does Gap Insurance Cost?

Totaled insurance premium difference can be huge depending on who sells it. If you purchase your gap coverage from a vehicle insurance company, it usually costs about $20 a year, according to the Insurance Information Institute. Most insurers sell such coverage and some may include it automatically when you buy a full coverage car insurance policy 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 gap 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 gap protection and usually from typical car insurance companies. Otherwise, you may pay 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 cover. Nevertheless, you will probably have to purchase full coverage auto insurance anyway because lenders and leasing companies will require it. In any case, you cannot drive a car without insurance and therefore you need to purchase minimum liability coverage.

Typical insurance companies wouldn’t sell gap without collision and comprehensive coverage. Without those covers you have no means of paying off your loan anyway that it is pointless to worry about the gap.

What Is a Gap Waiver?

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

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