Full coverage auto insurance is required when you finance or lease a car, but what about GAP insurance? GAP stands for guaranteed asset protection, and it can be a great idea to consider it – especially when it’s cheap.
Is GAP Coverage Worth it?
GAP insurance coverage is entirely optional, and it’s rather inexpensive. GAP coverage generally costs around $20 to $40 for the entire year, and possibly even less. The overall cost depends on your vehicle, but that’s about what you can expect when you’re rate shopping.
GAP insurance covers the “gap” between what you owe and your car’s value. If something were to happen to your vehicle, your auto insurance only pays up to what your car’s value is at the time of the incident (such as theft or an accident). If you were to get into an accident or your stolen vehicle is never recovered, and your car’s value is less than what you owe on your auto loan (called negative equity), your GAP insurance steps in to cover that deficiency balance.
You total your vehicle that's valued to be worth $10,000. However, you owe $13,000 on your loan. GAP insurance pays that $3,000 so you don’t have to, and your full coverage auto insurance pays out the value of your car.
Compare the cost of paying around $20 to $40 yearly to having to shell out possibly hundreds or thousands in negative equity. Even if you finance your vehicle for 84 months, the most you’re likely to pay for your auto loan term is probably around $250 in total for GAP insurance. The exact amount varies, but this peace of mind is well worth the money for many borrowers.
What GAP Insurance Doesn’t Cover
GAP insurance isn’t for people who own their car outright. GAP coverage guarantees that your entire loan or lease balance is paid if your vehicle is stolen or totaled. It’s extremely helpful for borrowers who take on a large auto loan or lessees, but it doesn’t help those who already own their car.
GAP insurance doesn’t cover vehicle payments for financial hardships, unemployment, or death. It also can’t pay for interest charges accrued on your loan – just the principal. If you’ve accrued lots of money on your car loan due to a high interest rate, GAP insurance doesn’t cover those interest charges.
If your high interest rate is the primary reason you’re worried about negative equity, GAP insurance doesn’t alleviate those concerns. Refinancing your auto loan later may be a better idea if you’re worried about paying a lot of money for interest charges if something happens.
When Does GAP Insurance Make Sense?
There are four main scenarios when GAP insurance makes the most sense:
- GAP insurance is usually worth the money for borrowers who finance or lease brand-new cars. Since new vehicles lose their value very quickly in those first few years of ownership – typically around 20% in the first year alone – GAP insurance can be helpful if something happens.
- Another scenario GAP coverage makes sense is when you don’t put any money down on your car, or very little. Down payments lower the odds of your vehicle being in negative equity, and with a small down payment or none at all, GAP insurance can protect you from paying out of pocket for your negative equity.
- If you drive a lot and really tack on the mileage on all your cars, then GAP insurance may be worth the money, too. Since mileage can really depreciate a vehicle’s value quickly, you could find yourself owing more on the car than it’s worth if you drive a lot.
- One more situation where GAP insurance may be worth it is if you don’t have a large savings. If your vehicle is stolen and you have negative equity, would you be able to cover that deficiency balance to the lender/lessor if the car is never recovered? For those without the disposable income to cover large, unexpected expenses, GAP insurance could be worth it.
When Can I Buy GAP Insurance?
Most dealerships offer GAP coverage while you’re finishing up the car buying process with the finance and insurance (F&I) manager. A lot of the time, the F&I manager can roll the cost of the coverage into your auto loan.
You can also check with the car insurance provider. Many, if not most, offer their own GAP insurance policies that you can add to your full coverage policy. Lenders may also be able to offer their own GAP coverage as well. It doesn’t hurt to compare prices from the dealer, your auto insurance, and your lender if you want to find the best price for your situation.
Also keep in mind that not every insurer can offer GAP insurance for used vehicles. Some may consider a gently used or fairly newer car, but most prefer brand-new vehicles or leased cars.
On the Hunt for an Auto Loan?
Finding the right vehicle, comparing insurance policies, and considering optional coverage are just a few parts of the car buying process. For many borrowers, locating a lender that assists with bad credit is the toughest part of buying a vehicle.
If your credit score has been getting in the way of auto financing, then consider a special finance dealership that’s signed up with subprime lenders. Instead of only relying on your credit score for a car loan approval, they look at the many parts of your financial stability to determine eligibility. We want to help you find a dealer that has bad credit lending methods here at Auto Credit Express.
Complete our free, no-obligation auto loan request form. We’ve created a nationwide network of dealerships over the last 20 years, and we’ll look for a dealer in your local area.