What Is GAP Insurance?

GAP insurance is optional, supplemental insurance that can cover your losses if you’re in an accident that totals your vehicle. Learn more about GAP insurance, including when you need it and when to skip it.

GAP insurance is a type of car insurance that protects you from owing on a vehicle loan in the event your car is totaled. GAP insurance refers to guaranteed auto protection and is a type of supplemental insurance that reimburses you if your insurance payout doesn’t cover the total cost of your vehicle. A GAP insurance policy covers the difference between the amount your insurance policy pays out versus the amount of loan you have leftover.

How Does GAP Insurance Work?

Image used with permission via Unsplash by Vlad Deep

If your vehicle is stolen, or if you total it in an accident in Marion, Illinois, within the first few years of ownership, you may end up owing more than the insurance company is willing to pay. If this happens, and you purchase GAP insurance, the insurance provider will step in to take care of the leftover balance.

For example, you purchase a sports car for $80,000. You pay a $5,000 deposit and finance the leftover $75,000. You buy full coverage insurance for your vehicle, including payout for a total loss due to an accident or theft. A few months later, you return home one day to find that someone has stolen your vehicle, and you immediately submit a claim with your insurance company.

The insurance company values your vehicle at $70,000 using the actual cash value, and then they issue a check to your lender for that amount. However, you still owe the lender $5,000, even though you no longer have a vehicle to drive. If you had purchased GAP insurance, your insurance provider would have paid the leftover $5,000 balance.

When Should I Buy GAP Insurance?

Whether you need GAP insurance depends on the following factors:

• The type of vehicle you purchase: Some vehicles maintain their value better than others. If you buy an expensive sports car, GAP insurance may be necessary.
• The value of your vehicle: The value of your vehicle is also important to consider. If you drive a car with a higher value, you may end up owing more than what the insurance company pays.
• How much you owe on your vehicle: It may be beneficial to buy GAP insurance if you owe more on your car than it’s currently worth, which can occur when you put down a minimal or no deposit.
• If you lease or buy: Leasing a vehicle can increase the chances that you’ll owe more than what your insurance company pays out. Many lenders require customers who lease to buy GAP insurance.
• Your lender requires it: In some cases, a lender may require that you buy GAP insurance. They may require GAP insurance for specific vehicles or types of vehicles to ensure you have enough coverage.
• You rolled equity over from another loan: Some dealerships also allow car buyers to roll the excess loan amount of a previous vehicle into a new loan, thereby leading to a situation where you finance more than the vehicle’s value.

Owing more on your auto loan than what your vehicle is worth can also be referred to as an upside-down loan. This term means that the value of your car is currently less than its market value. This situation isn’t uncommon if you take advantage of low or no deposit buying deals. In some cases, the low cost of GAP insurance may be worth the cost of not having to put a large amount of money on the purchase of your vehicle.

Know When to Skip GAP Insurance

While GAP insurance can be beneficial if you need it, it can also be an unnecessary cost if you don’t. You may be able to skip GAP insurance with the following situations:

• You plan to put 20% or more of a deposit on your vehicle.
• You plan on paying off your auto loan in less than five years.
• You purchase a vehicle that historically maintains its value.
• You buy a car that is below market value at a great deal.

GAP insurance can be useful in some situations, but you may not always need it. You can skip GAP insurance if you put at least 20% down on your vehicle purchase. A deposit of at least 20% reduces the loan value of your vehicle, and this is usually enough to owe less than your vehicle is worth.

The length of your loan can also determine whether or not you need GAP insurance. Longer loans of six or seven years usually mean that you pay more interest on your car. Because it takes longer to pay off your car with longer loans, gap coverage may be necessary. However, if you have a loan of five years or less, you may not need GAP insurance.

Of course, it’s also essential to do your research when buying a new car. Always check the car’s value before buying to ensure you don’t end up paying a significant amount more than its value.

Know When to Drop GAP Insurance

You don’t have to carry GAP insurance for the whole ownership of your vehicle. Continue monitoring its value and the amount you owe to the lender to decide when it makes sense to drop GAP coverage.

One of the primary reasons an insurance company may value your vehicle at less than your loan amount is that cars depreciate quickly in the first year of ownership, and that means it may take time for your value and loan amount to catch up. Once it does, you can remove GAP insurance from your policy.

Where to Buy GAP Insurance

You can buy GAP insurance from a few places. It may be available to you through your dealership, especially if you receive financing through them. Otherwise, you can usually buy GAP insurance from your insurance provider. Most providers require that you be an original owner of the vehicle and that the vehicle is not older than two or three years to buy GAP insurance.

You can avoid buying GAP insurance by putting a larger deposit on your purchase or ensuring you get a great deal. When you visit VW of Marion, you get access to a large inventory of competitively priced vehicles, ensuring you always get the best deal.