Buying a new car can be an exciting experience, but there are financial challenges that may arise afterwards. One of the most frustrating occurrences a car owner can deal with is a total or stolen vehicle situation. In this instance, if the vehicle is financed, you may struggle to repay the loan and cover the expenses of a damaged vehicle.
This is where GAP (Guaranteed Asset Protection) insurance comes in. This type of optional coverage can help pay the difference between your loan amount and your car’s current market value after it’s been deemed a total loss. Understanding GAP insurance coverage and its benefits can be a crucial step for drivers who are worried about or have previously dealt with a total loss.
Understanding GAP insurance
So, what exactly is GAP insurance? In simple terms, it can bridge the gap between your car's actual cash value and the amount you owe on your loan. Essentially, it can help you avoid paying out of pocket for the difference if your vehicle is totaled in an accident. Without this coverage, you could find yourself responsible for the monetary gap between what your insurance pays and what’s left of your car loan.
GAP insurance can help protect you against financial risks associated with a car’s depreciating value. New vehicles can depreciate quickly, often by 20% or more in the first year alone. This means that without GAP insurance, car owners may find themselves in a difficult financial situation after a total loss. It’s essential for buyers, particularly those financing their vehicles, to understand the risk of dismissing GAP insurance before getting on the road.
When GAP insurance is beneficial
Now, you may be wondering, do I need GAP insurance? Though most drivers can benefit from GAP insurance, this type of coverage is especially beneficial for new car buyers who have high loan balances or have made a lower down payment. If your down payment is 20% of the car’s price, you may end up with negative equity, meaning you owe more on your vehicle loan than its market value. In such cases, having this GAP insurance can help pay for monetary gaps after a total loss.
How GAP insurance works
Let’s say you get into an accident, and your car is declared a total loss. The insurance company assesses your vehicle's market value and decides its worth is $20,000. However, you still owe $25,000 on your car loan.
Without GAP insurance, you could receive the $20,000 from your insurance and still owe $5,000 to your bank or lender. Depending on the situation, GAP insurance can help pay that $5,000 difference.
Is GAP insurance required?
While GAP insurance isn’t legally required, some lenders or leasing companies may need you to buy it. If you're leasing a vehicle, you may have to include GAP insurance as part of your lease agreement. Always read the fine print and understand your obligations before completing an insurance purchase no matter the coverage type.
What happens if I don’t have GAP insurance?
If you decide not to purchase GAP insurance and later find yourself in a situation where your car is totaled or stolen, you may face financial challenges. While GAP insurance isn’t a legal requirement, you might find yourself in a difficult predicament without it.
If you don’t have GAP coverage, you would be responsible for paying off the difference between your loan and your car’s actual cash value independently. Adding GAP insurance to your auto insurance policy can help you navigate an unfortunate situation like a stolen or totaled vehicle and minimize expenses.
How to purchase GAP insurance
There are several ways to obtain GAP insurance. You can purchase this coverage through:
- Dealerships: When you buy your car, the dealership may offer GAP insurance as part of the sales process. This can be convenient for drivers with leased vehicles, but it’s crucial to compare costs between providers to see if the price fits your budget.
- Insurance companies: Certain car insurance providers may also offer GAP insurance as an additional policy.
Whichever option you choose, take the time to compare costs and coverage between various providers.
Is GAP Insurance right for me?
Whether or not you need GAP insurance depends on your specific situation. Consider factors such as your loan amount, your vehicle's depreciation rate, and how much you can afford to pay out of pocket in the event of a total loss. If you're financing a new car with a high loan balance or made a small down payment on a vehicle, GAP insurance might be a wise choice. Whether you choose to purchase it or not, being aware of GAP coverage’s benefits is important for many drivers who have outstanding loans or lease their vehicles.
Though IIA doesn’t offer GAP Insurance at this time, we do offer lots of other products for your auto insurance needs. Call us to speak with one of our Spanish bilingual agents at 1-855-478-3705 today to discuss your options.