GAP insurance, also known as Guaranteed Asset Protection or Guaranteed Auto Protection is a worthwhile investment that offers you adequate protection from the otherwise costly effects of depreciation. In essence, it eliminates the risk that your car insurer will not pay out enough to cover your losses in the event of an accident or theft.
Most collision and comprehensive insurance policies will replace your brand new car in the event that it is totaled or stolen within the first twelve months of coverage. However, if your car is stolen or written off at any time after this period, you’ll be required to pay the difference between what you still owe on the vehicle and its assessed market value.
Given the level of depreciation that a car goes through in its first year, this amount can be considerable. This is where GAP insurance comes in to protect you. It covers the gap between what you owe on your vehicle and what the insurance company will pay you for it in the event of an accident.
How GAP Insurance Works
There are a number of different types of GAP insurance, but the concept is still the same. To help illustrate how GAP insurance works, consider the following example: You buy a brand new car worth $25,000. Because of your excellent credit, you are not required to put any money down so you get 100% financing.
Some new cars lose as much as one-third of their value in three years. Two years later, car’s market value has depreciated to $15,000. However, your low car payments have lowered your financing amount by approximately $4800. This means you still owe $20,200. If the car is either stolen or totaled in an accident that was not your fault, the insurance company will only pay you the market value of the car. If you don’t have GAP insurance, you will have to pay the difference of $5,200 from your own pocket.
Who Needs GAP Insurance
GAP insurance could be a useful insurance to have if:
- You bought your car using finance or a personal loan, especially if you used no money down incentives.
- You have financed a vehicle for 60 months or longer.
- Your annual mileage exceeds 18,000 miles.
- You’re paying a lot of interest on your car.
- The kind of car you have depreciates quickly.
- You’re paying the debt off slowly.
- The structure of your finance arrangement means that you are due to be left with a balloon payment.
- You wouldn’t be able to afford to replace your car.
- You’re on a long-term leasing arrangement, and you’re concerned that if the car you’re renting is stolen, you migh end up owing the leasing co pany more than your insurance company is willing to pay out.
- The make or model of your vehicle is no longer in production.
- You have a history of getting into accidents.
- You have rolled negative equity from a previous vehicle to a new loan.
- You put down a down payment of less than 20%.
GAP insurance is probably not required in the following circumstances:
- You did not finance your car payment.
- You have a large amount of equity in your car.
- You put down a large downpayment.