GAP insurance, which stands for guaranteed asset protection, is a form of supplementary coverage that helps protect you from the unexpected when you have an auto loan. It covers the gap (no pun intended) between your vehicle's value and the amount you owe on your loan should it get totaled or stolen, and it's a great thing to have when you're financing a car as a bad credit borrower.

GAP Insurance Can Save You Money

What Is GAP Insurance?When you finance a vehicle, whether new or used, it's going to lose value over time. This is called depreciation, and it can't be stopped. Depreciation can result in you owing more on your loan than the car is worth. This means you have negative equity, which is also called being upside down or underwater.

Negative equity is quite common, especially early on in a loan. It's even more common in certain situations, such as if you got a new or nearly new vehicle, or only made a small or no down payment.

If something were to happen to your car before you make enough payments to have equity, such as it getting totaled or stolen, GAP insurance would cover what your regular auto insurance doesn't.

Without GAP, you're still responsible for paying any balance your insurance doesn’t cover in this scenario. If you have GAP insurance, you don't have this issue. Let's take a look at an example to see this in action:

Let's say you have a loan with a $10,000 balance and a vehicle worth $8,000, and it gets totaled one day on your way home from work. Your insurance company only has to cover the value of the car, and would cut a check for $8,000. Without GAP, you would personally be responsible for the $2,000 difference, meaning you would still owe $2,000 to your lender even though the vehicle is no longer drivable.

However, if you had GAP at the time of the accident, your policy would cover that $2,000 difference. This way, you aren't stuck making payments on a car you no longer have.

When You Should Get GAP Insurance

Here are a few other instances when it would be beneficial to have GAP coverage if something happens to your vehicle:

  • You have a long-term loan. The longer the loan term, the longer it takes you to bridge the distance between the car's value and the loan balance. If you have poor credit, having a longer loan term may lower your monthly payment, but your interest expenses increase and you’re upside down longer.
  • Your vehicle is depreciating rapidly. There are a couple of ways that depreciation can happen at a faster pace than usual. Most often, this happens when you put a lot of miles on your car in a short amount of time. This can also be an issue if the vehicle you're financing doesn't hold its value well.
  • You rolled over negative equity from a trade-in. Rolling over negative equity is often a bad choice because it leaves you even further underwater on your new loan. Plus, it's easy to get stuck in this cycle, which would eventually make the gap between the car's value and the loan amount quite wide.

GAP insurance isn't the only thing that can help cover the difference between your vehicle's value and loan amount, however. If you're looking to reduce that gap yourself before it starts, making a large down payment decreases the amount you borrow. This way, you start out with a smaller amount of negative equity and spend less time upside down in your loan.

Getting GAP Insurance

GAP insurance is typically available through the dealership you're working with as an additional product offered by the finance manager. If you choose to get it at the same time as your loan, the cost can typically be rolled into your loan, which means you don't have to worry about making a separate payment.

Most auto insurance companies also offer GAP coverage policies, so you may be able to get coverage through your insurance agent. It would be smart to compare multiple policies to find the best deal.

Like any insurance or extended warranty product, you may never need to use the GAP insurance you purchase. But, the cost of having it could be minimal compared to what you have to pay out of pocket if something were to happen to the car you’re financing. Often, borrowers find the peace of mind is worth the cost of having GAP coverage.

Ready to Get Your Next Vehicle?

Now that you know what GAP insurance is and why it can be important to have, you can be fully prepared for your next auto loan. If you're not sure where to start looking for a dealer to get a bad credit car loan through, let Auto Credit Express help.

We work with a nationwide network of special finance dealerships that have lending resources available to get people with bad credit, no credit, and even bankruptcy financed. Fill out our easy, zero-obligation auto loan request form, and we'll get to work matching you with a dealer in your area.