Your nearly new car has just been in an accident and insurance says it will have to be totaled. They’ve offered you an amount thousands below what you owe on the vehicle. This is a scenario where GAP insurance (before the accident) is needed.
GAP insurance is Guaranteed Asset Protection insurance. Typically, when a car is totaled the insurance company will pay you what the car is worth and if your loan is higher than that then you have to come up with the difference to pay off the loan. Gap insurance can cover that difference.
This difference often happens because the value of a car depreciates (quickly-as in the moment it drives off the lot) – i.e. the value goes down over time. Most often gap insurance is purchased for new cars, but it can be purchased for used cars. Gap insurance is NOT required.
NOTE: Financial experts prefer that you avoid placing yourself in a position where you need GAP Insurance. Before you go underwater on a car loan, chat with one of our accredited financial counselors to explore options that have a lower financial risk.
Coming Soon: You can read about how to avoid needing gap insurance here.
Here are some times you may want gap insurance?
- You put little to no money down to purchase a vehicle.
- Your vehicle loan is 5 years or longer. This is because the longer the loan, often the bigger the gap as it starts off depreciating faster than you can make payments.
- Your car is less than 3 years old – and you have a loan. New vehicles depreciate faster than older vehicles.
- You borrowed more than the car is worth. This could happen if a) you rolled “negative equity” from your prior vehicle into a new vehicle loan or b) if you paid an above market price–which often happens at car lots which sell to people with low credit scores/poor credit history or c) both a and b 🙁
- You are leasing a vehicle.
How to get gap insurance?
As with any purchase, it’s to your benefit to SHOP AROUND.
Here’s some options:
- Check with your auto insurance company to get a quote for gap insurance as part of your auto insurance policy or as a separate policy. This way tends to be the least expensive.
- Check your financial institution (or another one) and see if they offer gap insurance separately. This can often be less than what you pay through financing it (see below). Maybe half the cost or less.
- As part of your dealer financing it is often offered with your loan. Auto loans outside of a dealership also frequently offer gap insurance. Beware: When you finance a car this amount seems like less, because they wrap it into the car loan. However, when you factor in interest over the life of the loan it is costing you even more.
Can you Cancel Your Gap Insurance and get a refund? Typically, yes. If it was a lump sum payment you should be able to cancel it and get refunded the “unused premiums” based on how much of the term remains. If you pay the loan off early, or sell the car, then you should make sure that if you are due a partial refund of your gap insurance payment that you get it.
Always keep your financial contracts and agreements, so you can refer to them when needed.
Gap insurance is important if you can’t afford to cover that gap in the event of a total loss. If you need it, get it.
But take the time to shop around and keep the price down as low as possible. Getting it with your loan is likely the most expensive option, so shop around some especially with your own insurer.
Read more on Better: Better’s Best Money Advice for Couples – Better Financial Counseling Network
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