What Is a Gap Auto Insurance?
Gap insurance, short for Guaranteed Asset Protection insurance, is a type of auto insurance that covers the "gap" between the actual cash value (ACV) of your vehicle and the amount you still owe on your loan or lease if your car is totaled or stolen. This insurance is specifically designed to protect consumers who finance or lease their vehicles, as cars often depreciate faster than the loan balance decreases, especially in the early years.
Here's how it works: if your car is deemed a total loss due to an accident or theft, your standard auto insurance policy will typically pay out its current market value. However, if the market value is less than what you still owe on your auto loan or lease, you would be responsible for paying the difference out of pocket. This difference can be substantial, depending on how much you initially financed, your down payment, and your vehicle's depreciation rate. Gap insurance is designed to cover this difference, ensuring you're not financially disadvantaged if your car is lost and you owe more than it's worth at the time of loss.
In essence, gap insurance is financial protection that keeps you from having to cover the "gap" between the insurance payout and your loan balance, offering peace of mind for new car buyers and those who lease their vehicles.
When Gap Insurance Is Necessary?
As we said above, gap insurance becomes particularly relevant and necessary in specific situations where the risk of a financial shortfall between your vehicle's ACV and the amount you owe on your loan or lease is higher. Here are the scenarios where gap insurance is strongly recommended.
1. Small Down Payment
If you made a small down payment (less than 20%) or financed your vehicle for 60 months or longer, the loan balance can quickly exceed the car's depreciating value, making gap insurance crucial.
2. High Depreciation Rate Vehicles
Some vehicles depreciate faster due to brand, model, market trends, etc. Owning a vehicle known for its rapid loss in value means you’re more likely to need gap insurance.
3. Long-Term Financing
Loans extending beyond the standard 3 to 5 years carry a higher risk of ending up "upside-down" (owing more than the vehicle's worth), especially in the early years of the loan term.
4. Leased Vehicles
Leasing companies often require gap insurance as part of the lease agreement because, with a lease, you’re not paying down the principal on the vehicle as quickly as you might with a loan, increasing the gap risk.
5. Heavy Use
If you drive more than the average 12,000 to 15,000 miles per year, your vehicle’s value will depreciate more quickly due to higher mileage, increasing the likelihood of needing gap insurance.
6. Rolled-over Loan
If you rolled over a previous auto loan into a new loan, you’re starting with a higher principal, increasing the chance that you owe more than the car’s worth right from the start.
7. No Comprehensive or Collision Coverage
If your auto insurance policy does not include a collision or comprehensive coverage option, you might find gap insurance necessary as an added layer of protection. However, it's important to note that most gap insurance policies require comprehensive and collision coverage as a prerequisite.
How Much Is Gap Auto Insurance?
When opting for gap insurance, you have two main avenues for purchase: through an auto insurance provider or directly from a dealership or lender. Prices can differ markedly between these options. Adding gap insurance to an existing auto insurance policy is the more economical choice, often costing an additional $20 to $40 per year. This method keeps costs low and simplifies your financial protections under a single provider.
Conversely, purchasing gap insurance from a dealership or finance company tends to be pricier, with one-time fees ranging from $500 to $700. This amount is frequently rolled into your loan amount, accruing interest over time and potentially increasing the overall cost. Several key factors influence the price of gap insurance:
- Vehicle Value. Higher-priced vehicles may command higher car insurance premiums due to the increased potential payout.
- Loan Terms. The length of your loan affects the price, with longer loans posing a greater risk of an upside-down loan situation.
- Lease vs. Purchase. Leasing conditions often come with specific gap insurance requirements, impacting cost.
- Insurance Provider. Costs vary between insurers based on risk assessments and coverage specifics.
To find cost-effective gap insurance without sacrificing coverage, start by comparing quotes from multiple insurers and asking about discounts for bundling policies. Review your auto insurance policy to understand what's already covered and whether adding gap insurance directly through your insurer could offer savings.