GAP is the insurance industry’s acronym for “Guaranteed Auto Protection.” Car gap insurance is a policy that covers the difference between what the insurance company reimburses a policyholder when a vehicle is a total loss after a covered accident and any outstanding loan balance.
When financing a vehicle, many lenders will require car gap insurance for some types of automobiles. In the event of a covered total loss, gap insurance covers the difference in the outstanding balance of a car loan and the car’s current value. The policy is especially beneficial for vehicles that depreciate more quickly than other vehicles, such as SUVs and luxury cars.
How Does Car Gap Insurance Work?
A new car owner typically owes the lender more than their new car is worth during the early stages of a car loan or lease. Therefore, in the early stages of a loan, the owner owes more to the lender than the car is worth.
Over the first five years, a vehicle will depreciate by about 50% on average.
So, if the car owner has an accident and his auto policy does not pay enough to cover the car loan balance, gap insurance could cover the difference.
Do You Need Gap Insurance?
For many vehicle loans and lease agreements, lenders require gap insurance. Gap insurance can also be beneficial when a vehicle owner has significant negative equity in a car.
It is common for vehicle owners to have negative equity, especially when they make a small down payment at purchase and choose a long-term loan.
Some of the situations where car gap insurance makes sense include:
Loans with a down payment of less than 20%.
Loan terms of 60 months or longer.
A vehicle is leased.
Vehicles that depreciate more quickly than the average vehicle.
Negative equity from a previous car loan is rolled over into a new loan.
In any of these scenarios, car gap insurance can save consumers from challenging financial consequences.
Who Needs Car Gap Insurance?
A new car is typically the second-most expensive purchase most people will make. The average new vehicle loan is $34,635 with a loan term of 70 months. So, car gap insurance is a good choice for most new car owners. It is an especially wise choice for those who pay less than 20% down on a new vehicle.
It is not necessary to carry gap insurance for the life of the vehicle or the life of the loan. Gap insurance should only be maintained until the loan balance no longer exceeds the vehicle’s value.
Do You Need Car Gap Insurance If You Have Full Coverage?
In the event of a covered total loss, full coverage or comprehensive auto insurance generally pays the car’s cash value, which may be less than the amount owed on the car loan.
Car gap insurance is needed to cover the difference between the amount paid by the insurance company for full coverage and the amount owed to pay off the car loan.
Does My Auto Insurance Policy Include Gap Coverage?
Many auto carriers offer the option of endorsing your auto policy with loan or lease coverage to your policy when a new vehicle is purchased or leased. The auto insurance carrier’s gap insurance is much more affordable than what the dealership or financing company offers you. The stipulation would be that you would need to stay with the same insurance carrier to continue the gap insurance. If you decide to switch carriers before your loan is paid off, you will not be able to obtain the gap insurance endorsement on the new policy as your vehicle is no longer new.
Car gap insurance is an excellent option for any vehicle owner with negative equity in their vehicle. Should an accident occur and the vehicle be declared a total loss, the gap between the car’s current value and the remaining balance of the loan could be covered by car gap insurance.
If you are in the market for a new car, gap insurance can help avoid financial hardship if the vehicle is a total loss in the first few years of ownership.
ABC Dennis Insurance
ABC Dennis Insurance is an independent insurance agency established in 1997 that provides automobile insurance to its customers. If you have not reviewed your insurance coverages this year, please call our office at (813) 949-7765 or email us.
Besides auto insurance, we can help with all your insurance needs. As an independent agency, we find the best insurance coverage with the most competitive rates.