Why Do I Need Gap Coverage on My Car Loan?
Anyone who has financed a vehicle has probably heard the term "GAP Insurance." Gap stands for Guaranteed Auto Protection. It is a supplemental insurance product designed to provide additional protection to consumers with auto loans. Most consumer-automotive groups, including Edmunds.com and MSN Autos, recommend GAP insurance.
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Function
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GAP insurance kicks in after your auto insurance has paid a claim on a totaled vehicle. Gap insurance pays all, or most of, the remaining balance on your auto loan. It is not a substitute for standard-auto insurance. GAP insurance does not pay anything if the vehicle is not financed, nor is it purchased or added during the cash purchase of a vehicle. GAP insurance works for both new and used vehicles.
Considerations
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Standard-auto insurance does not automatically pay off a vehicle when it is declared a total loss. The insurance company pays the estimated value of the vehicle, minus your policy's deductible. In many cases, the amount owed on an auto loan is higher than the vehicle's value. According to an NPR report, nearly 1/4 of auto loans are "under water" or "upside-down," which means that the balance is higher than the value. GAP insurance helps bridge this gap.
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Purchase Options
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New and used-auto dealers usually offer GAP insurance at the time of sale. Additionally, banks and credit unions may offer the insurance when closing on an auto loan. However, many insurance companies also offer GAP insurance as a policy add-on. According to CUNA Mutual Group, the average cost of GAP insurance through a dealer is $500. The cost may be lower through a credit union or insurance company---it's best to shop around.
Misconceptions
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Some believe that GAP insurance pays the entire deficiency balance. This is rarely true. Each GAP policy has a specifically stated limit, usually found on the front of the contract. This limit may be $5,000, $7,000 or even higher; it depends on the policy. It's important to realize that GAP will not pay the entire deficiency balance if you are extremely "upside-down," but it will still help pay toward the difference.
Risks Without Gap Insurance
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Vehicles are depreciating assets. As soon as a new car rolls off the lot, it loses value. Many times, its depreciation is too fast for your monthly payments, which are often laden with interest, to keep up with. A large down payment (20 percent or more) can help alleviate how "upside-down" you are, but even in such circumstances, purchasing GAP insurance provides additional peace of mind. Buyers who trade in an upside-down vehicle, or finance for long terms, should always strongly consider GAP insurance.
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