What is GAP Insurance and Do I Need It?
If you are rolling in negative equity from a previous loan, have Low or No Money Down or if you Lease. You Need GAP Insurance.
Please watch the short video and read the information below to see if GAP Insurance is right for you.
If your car is stolen or totaled in an accident, will your insurance company repay you for the total amount? For most people, the answer is maybe. Depending on how you financed your car, you may also need a relatively little-known form of coverage called GAP (guaranteed auto protection) insurance to pay off the full amount of your loan.
What GAP insurance is:
Simply, it covers the gap, or difference, between your car’s actual value and what you still owe on it. A one-time payment of a few hundred dollars for GAP insurance could save you thousands if your car is totaled or stolen in its first few years of ownership, or at any time during a lease.
Why do you need it? Your car depreciates about 20 percent as soon as you drive it off the lot, and it continues to depreciate significantly for the first two or three years. If your car were to be stolen or totaled during this time, insurance would pay you the actual cash value (ACV) of your car. Your loan amount could be significantly more, however, leaving you on the hook for the difference. (To see the five-year depreciation schedule for any new or used car, check out Edmunds’ True Cost to Own.)
For example, if you pay $20,000 for a new car and a year later it gets totaled, you still owe the lender $17,000. Post accident, your insurance company tells you that the car’s ACV is only $14,000. In the end, the insurance pays only $14,000, leaving you with a $3,000 debt to the lender. Unless you have GAP insurance, you’ll have to break a lot of piggy banks to pay that difference.
Who Needs GAP Coverage?
GAP coverage is highly recommended on a new car for consumers who:
- Make a down payment of less than 20 percent
- Roll negative equity from a previous car loan into a new car loan
- Finance for 72 months or more
- Finance a vehicle that depreciates very quickly (luxury, highly optioned, many domestic vehicles)
- Lease a vehicle
