There are few things more exciting than driving a new vehicle off the lot. You have that new car smell, the latest technology, and a reliable car. But as you drive home, there is a silent financial factor at play that many buyers overlook: Depreciation.
If the unthinkable happens, like a total-loss accident or theft, you might find yourself in a financial hole, owing money on a car you can no longer drive.
This is where GAP Insurance comes in. But what is it, and is it right for you?
What is GAP Insurance?
GAP stands for Guaranteed Asset Protection.
To understand GAP, you first have to understand how standard auto insurance works. If your vehicle is totaled or stolen, your comprehensive or collision insurance will typically pay you the current market value (or actual cash value) of the car.
However, cars depreciate quickly. In fact, a new car can lose up to 20% of its value within the first year of ownership.
If you financed your car, there is a very real possibility that the amount you owe on your loan is higher than the car’s market value. This is called being "upside-down" or "underwater" on your loan.
GAP Insurance pays the difference (the "gap") between what your insurance company pays out and the remaining balance on your auto loan.
A Real-World Scenario
Let’s look at the math to see how this saves your wallet:
- You buy a new car and take out a loan for $35,000.
- A year later, the car is totaled in an accident.
- Because of depreciation, the insurance company determines the car’s market value is only $28,000.
- The Problem: You still owe the bank $33,000, but the insurance check is only for $28,000. You are short $5,000.
Without GAP Insurance: You must pay that $5,000 out of your own pocket to settle the loan on a car that is totaled.
With GAP Insurance: The GAP policy pays that $5,000 for you. (Note: Many GAP policies also cover your primary insurance deductible, up to a certain limit.)
Who Needs GAP Insurance?
Not every driver needs GAP. If you paid cash for your car or made a massive down payment, you likely have enough equity that standard insurance will cover your loss.
However, you should strongly consider GAP if:
- You made a small down payment: If you put down less than 20%, you will likely be upside-down on the loan the moment you drive off the lot.
- You have a long loan term: Loans lasting 60 months (5 years) or longer result in building equity much slower than the car depreciates.
- You rolled over negative equity: If you traded in an old car that you still owed money on, and added that balance to your new loan, GAP is essential.
- You bought a car with high depreciation: Some luxury vehicles or SUVs lose value much faster than economy sedans.
- You drive a lot: High mileage kills a car's resale value, increasing the gap between what it's worth and what you owe.
Where Should You Buy GAP?
You will almost certainly be offered GAP insurance at the dealership when you are signing your paperwork. While convenient, buying it at the dealership is often the most expensive option.
Credit unions often offer GAP policies that are identical (or better) than dealer policies but at a fraction of the cost, saving you hundreds of dollars. Plus, the cost can usually be rolled right into your monthly auto loan payment.
The Bottom Line
No one plans on their car getting totaled or stolen, but it happens every day. GAP insurance provides peace of mind for just a few dollars a month, ensuring that a car accident doesn't turn into a financial disaster.
Are you looking to buy a new vehicle? Contact our loan officers today to ask about adding GAP protection to your auto loan.