Is GAP Insurance Worth it if you Still Owe Money on Your Car?
The average new vehicle depreciates 11 percent once it leaves a dealership lot. After a year, most automobiles lose 20 percent of their value, according to the nonprofit Insurance Information Institute.
When signing dealership paperwork, drivers should consider an insurance option designed to fill in the “gap” that occurs once your vehicle starts losing value, says Jeff Sibel, spokesman for Progressive.
Purchasing GAP coverage can be a great way to make sure you’re fully covered in case your car is totaled during an accident and you still owe the unpaid loan amount, Sibel says.
For example, a Progressive client bought a new car for $29,000. Several weeks later, while driving, he swerved to avoid hitting a deer and the vehicle rolled into a ditch. The insurance company decided the car was totaled and determined the actual cash value, or the vehicle’s replacement cost minus its depreciation, was $25,000.
After paying the $500 collision deductible the client still owed $4,500 on the car loan. The $4,500 is what a GAP insurance policy covers.
“(GAP insurance) provides drivers with peace of mind that they won’t have to pay thousands of dollars out of their own pocket,” Sibel says.
What Are the Benefits of GAP Insurance?
GAP Insurance also known as guaranteed asset protection insurance covers the difference between your loan amount and the value of your vehicle after depreciation. If you lease a car, GAP insurance is required. Gap insurance is an optional car insurance coverage that helps pay off your auto loan if your car is totaled or stolen and you owe more than the car’s depreciated value.
GAP car insurance is optional, but it will you pay off your auto loan should you find yourself in a situation where your car is stolen or completely totaled that you actually owe more than the car’s value. It can be very beneficial to have should you run into that situation.
Here are three benefits of GAP insurance if you buy or lease a vehicle.
It Can Cover a Large Financial Gap
Most GAP policies protect new and used vehicles valued up to $100,000, losses up to $50,000 and sometimes insurance deductibles up to $1,000, according to Allstate.
The Insurance Information Institute recommends GAP insurance for anyone in one or more of these situations:
- If you make a down payment less than 20 percent.
- If you finance a car loan beyond 60 months.
- If you roll a past car loan into the new loan.
- If you buy a vehicle that depreciates quickly, such as budget-friendly compact cars for less than $15,000 and vehicles by automakers experiencing financial problems. These vehicles depreciate quickly because they are more difficult to re-sell.
“This coverage is like having a net underneath when an acrobat walks a tightrope. Even the most skilled acrobat can make a mistake and tumble,” says April Eaton, corporate relations manager for Allstate. “Likewise, even the most cautious driver can get into an accident that causes financial hardship.”
It Can Be Paid in Different Ways
GAP insurance costs about $200 to $700 for the life of your automobile loan, depending on dealer, lender and state. You can add GAP coverage either at the dealership or with an auto insurance company.
If you purchase a vehicle, GAP insurance payments can be incorporated into your auto loan, giving you the option to pay for the coverage monthly rather than all at once. The option typically costs between $500 and $700 once you factor in the interest charged during the loan, according to Allstate.
You can request a refund of remaining GAP payments from the dealership if you trade in your vehicle or pay off your loan early, Allstate says.
Auto insurance companies typically calculate GAP coverage as 5 percent of your deductible. For example, if your collision and comprehensive costs are $500, GAP insurance will add about $25 to your annual premium, according to the Insurance Information Institute.
GAP insurance is intended for the life of the vehicle loan — when you no longer have a “gap” — and under this option would add up to as little as $125 for a five-year loan.
And you don’t have to purchase it immediately when you buy a car. Some insurance companies will sell coverage as late as 12 months after the purchase or after you’ve driven up to 15,000 miles, according to Edmunds.com.
Gap Insurance Has One Purpose
GAP insurance is there for the worst case scenario: Your car being totaled.
Customers often have misconceptions about what GAP covers, Eaton says. It doesn’t cover these situations:
- Paying the loan if you lose your job or have a disability.
- Reimbursing repairs if your automobile is damaged in an accident but not totaled.
- Renting a car if your vehicle is damaged in an accident.
- Covering the difference between what your car was worth before an accident and after it is repaired.
“Keep in mind that GAP covers the difference between what you owe and what your car is worth,” Eaton says. “It can help (keep) you from being upside-down in debt on a vehicle.” Let us help you compare free car insurance quotes that have GAP insurance coverage.