GAP Insurance Simply Explained
GAP stands for Guaranteed Auto Protection. Here's the straightforward explanation is: If you lease or finance your vehicle, and your vehicle is ever considered a total loss due to an accident, theft, or natural disaster, GAP insurance will cover the difference between the actual cash value (ACV) of the vehicle and the balance still owed on the financing.
What are you actually insuring with GAP?
Let’s say you still owe $30,000 on your car loan. Now, if you get into an accident or your vehicle is stolen, and your insurer determines your vehicle’s value to be $25,000, they will write you a check for $25,000 and YOU will be left with a $5,000 balance on your loan. This is because it does not matter what you owe on the loan. It only matters what the Fair Market Value of the vehicle is. GAP covers the difference in what your vehicle is worth and what you owe.
It's also worth noting that GAP does not cover deductibles, death/life insurance, liabilities, engine failure, or extended warranties.
There are 3 main things to think about when considering GAP
Your Financing Terms —If the term length on your loan is long, say 60 months or more, you may want to consider GAP insurance. This is because in the first few years of a loan you do not contribute as much to the principal amount you owe on the loan. This means that if your vehicle is totaled in the first few years of ownership, you may owe more on the loan than the vehicle is worth.
If you get a shorter loan, say 36 months, you may not need GAP because you will be quickly paying down the principal amount you owe on the loan.- Your Vehicles Depreciation Rate — Some vehicles depreciate faster than others. If you buy a brand like Toyota, Honda or Ford. These brands tend to have a slower depreciation rate than other brands. This means that if you buy a vehicle from one of these brands, you may not need GAP insurance (or at least not for long). Conversely, luxury cars tend to have faster depreciation rates. In these cases you will need to purchase GAP for a longer period of time.
- Bringing an Existing Loan — If you are bringing your old loan into your new one, you will probably need GAP. Bringing an old loan immediately places you in negative equity and will require you to pay for GAP for longer. Car dealers/lenders will actually require you to purchase it to protect themselves in case your vehicle is a total loss.
IMPORTANT! Not all insurers will cover this portion of your loan. Make sure to check with your insurer to see if they will cover the negative equity portion of your loan in case of a total loss
How Much is GAP Insurance?
Your lenders should change your GAP insurance rate every year as you get closer to a positive equity situation. In general, you can expect to pay anywhere from $200 - $800 over the life of the loan. Here are some factors that are considered by your insurer:
• Claims record
• Driving history
• Location
• Vehicle type
How to Avoid Paying GAP
- Get a Shorter Term Length — If you get a loan for 48 months or less, you won’t need GAP at all because you will be paying down the principal amount quicker than the vehicle is depreciating.
Purchase GAP through you car insurer, not the dealership — Purchasing GAP from your car dealership can often cost more than if you purchase it through your car insurer. It’s not unheard of for some car dealerships to mark up the price of GAP insurance by 100% - 300%. This is because they are not the ones who are actually providing the insurance. They are simply the middleman.
- Make a 20% Down Payment — Making an initial payment of 20% or more is an easy way to avoid going into negative equity on your auto loan. It not only reduces the amount of interest you pay, but it will also increase the amount of principal you pay off in the first few years of the loan.
- DO NOT LEASE! — Even if you pay for the entire lease upfront, manufacturers may still require you to purchase GAP insurance. This is because you are not actually paying down the principal amount you owe on the vehicle. You are simply paying for the depreciation of the vehicle over the lease term.
- Don't Trade-in with an Outstanding Loan — The worst thing you can do is bring your old loan into your new one with a trade-in. It immediately places you in negative equity and will require you to pay for GAP for longer. Car dealers/lenders will actually require you to purchase it to protect themselves in case your vehicle is a total loss
The Bottom Line
Gap insurance is a discretionary coverage that may be mandated by the conditions of your lease or loan contract. It’s a sensible choice for individuals who have a considerable amount of negative equity in their vehicle. This typically includes motorists who made a small down payment or those who have an extended loan repayment term.
Check out our Car Loan Calculator to help you figure out how much you will owe on your loan at any given time. There is also some other information about vehicle depreciation you may find useful
Thanks for coming. I hope you found it helpful. If you have any questions or suggestions, please feel free to reach out to me at nolan.tronowicz@sparewires.com