Gap Auto Insurance Coverage | What Does Gap Insurance Cover?
What Is Gap Auto Insurance?
GAP auto insurance coverage is one the most necessary, yet least understood insurance products available to vehicle owners.
It's purpose is simple: If your car is totaled, gap auto insurance will cover the difference (or gap) between what your insurance company says your car is worth (actual cash value) and what you still owe on your loan or lease. It is also available for motorcycles, RV's, campers, and trailers.
What Does Gap Insurance Cover?
Typically, losses due to the following events are covered: Fire, Theft, Vandalism, Accident, Flood, Tornado, and Hurricane - including your deductible.
Since most new cars depreciate by as much as 20% the first year of ownership and an additional 15% the following year (Edmunds.com), it's likely that during this period the balance of your car loan will exceed the depreciated value of your vehicle. This financial shortfall, plus the amount of your deductible, could easily add up to thousands of dollars in the event of a total loss.
Your Car Loan Payoff
Your vehicle's Actual Cash Value
The First Gap
The Second Gap
Insurance settlement less deductible
The Total Gap (what you would owe)
You should consider adding GAP insurance coverage to your policy if:
1. You purchase a new or used car with little or no money down.
The more you borrow, the longer it takes before the loan balance and the actual cash value of your vehicle are roughly equal. This usually takes 3 - 4 years depending on the length of the loan and the interest rate.
2. You choose a 5 year or longer extended term loan.
An extended payback period dramatically increases the payoff amount during the first few years of the loan. This leaves you especially vulnerable to a situation where you could end up owing far more than your car is worth if it is totaled.
3. A low credit score forces you into a high interest loan.
Buyers with a credit score below 550 are currently being charged 13% for new car loans and 18% for used cars. If this is the case you definitely need Gap insurance coverage. But don't pay a new or used car dealer $700 for a non-refundable policy - not when you can purchase the same coverage for around $30 a year from a nationally recognized insurer.
What Gap Insurance Does Not Cover
The following gap insurance exclusions are fairly standard from policy to policy. Please check with your insurer for exact coverage and exclusions.