What is GAP Insurance?

It’s likely that most of us feel well covered with our auto insurance should we get in a major wreck, our car is stolen, or even get stuck in a natural disaster. But there are several scenarios that can leave you owing more on your car loan than your insurance might reimburse you for. It’s in these cases where Guaranteed Asset Protection (GAP) insurance can really help.

The basics of Gap insurance

GAP Insurance is an added policy that essentially covers the difference between your car’s value (what the insurance company will reimburse you for) and the amount or balance of your auto loan. The policy is to ensure you’re not left paying the difference yourself.

For example: Let’s say you owe $20,000 on an auto loan, and your vehicle’s current fair market value is $16,000. If your car is stolen or totaled in an accident, your insurance company will write you a check for $16,000, and you’ll have to come up with the extra $4,000 to pay off your loan. But if you have GAP insurance, it helps cover the difference, which in this example is $4,000.

Why is there a gap?

So why is there the possibility that there could be a gap between what your insurance would pay in the event of a major incident and what your remaining car loan amount is? The answer is depreciation.

We all know that our new cars begin to depreciate in value as soon as we drive it off the lot. Unfortunately, that can add up to roughly 10% in the first month and 20% in the first year. Then, about 15% each year after that. So, the first few years you have your new car, your depreciation could easily outpace the paydown of your auto loan.

Is GAP insurance right for you?

While you may not know exactly how fast your car will depreciate, there are some common ways to tell if you should consider GAP insurance. GAP insurance can be particularly helpful coverage if:

• Your down payment was less than 20% of your car’s purchase price.
• You have a loan or lease longer than 60 months.
• You had negative equity (or were “upside down”) on your trade in.
• Your new car happens to be a make that depreciates faster than others.
• You drive more than 15,000 miles per year on average.

For these situations, there’s a reasonable likelihood that your car’s depreciation can outpace your loan paydown – leaving you with a possible gap between the two and you having to come up with the difference in cash should something major happen to your car.

Do I need to get GAP when I buy the car?

Generally, you should consider purchasing GAP insurance within the first few years of owning your new car. This is when you’re most likely to see a difference between your car’s value (depreciated) and your remaining loan balance. It’s not usually required that you get GAP insurance at the very moment you buy your car.

Can I shop around for GAP?

Yes, you can shop for GAP insurance just like you do your regular auto insurance. The dealer where you buy your new car will likely be the first place that will offer to sell GAP insurance to you. That’s fine if it gives you peace of mind, but there may be other options that can give you better pricing for the same coverage or even better.

The financial institution (like Radiant Credit Union) with whom you have your car loan can also provide you the option for GAP insurance coverage – usually at a lower cost than a dealership. And your existing insurance provider may also offer GAP coverage on your new car. As with shopping for anything, it’s often a good idea to get a few price quotes from different providers to help you make your decision.

Need more information on GAP insurance?

At Radiant Credit Union, we’re happy to help explain GAP insurance in more detail (as well as other protections for your car, like mechanical breakdown coverage). We’ll do that for you whether your car loan is with us or not. We just like helping our members make better, more informed financial decisions.

Check out our Auto Loan page where you can read more about Gap Insurance and Mechanical breakdown Coverage.