When you’re buying a new vehicle or a relatively new used vehicle, one of the financial questions that will come up with the dealer is whether you would like to purchase GAP (Guaranteed Asset Protection) coverage. It’s common for people to view GAP coverage as just another expense, but it can be very helpful in certain circumstances.
If you’re purchasing a new or recent year vehicle, it is important to protect yourself financially in case your car is stolen or you get into an accident and your vehicle is written off by your insurance company. Let’s talk more about GAP coverage and why it might be right for you.
What is GAP Coverage?
GAP coverage is auto insurance that protects you from repaying the difference between the current value of your vehicle and the remaining car loan or lease balance if your car is damaged or stolen.
When cars are totaled or written-off after an accident, the insurer will reimburse the owner according to the car’s current market value (aka its ACV). The problem is that if the balance on your car loan or lease is greater than the car’s ACV, you will have a “loss” to make up out of pocket. GAP insurance will cover this difference so you don’t have to pay a lump sum of money for a car you can no longer drive.
How Does GAP Coverage Work?
Let’s take a look at an example. Imagine you financed a new car for $30,000 and after a year of driving it you are involved in an accident where it’s totaled. The problem is that cars typically depreciate in value, so it’s only worth $24,000 now but you still owe $28,000 on your loan. Your insurance will only pay the car’s market value (around $24,000), leaving you with a $4,000 difference. GAP coverage covers the $4,000 gap for you and eliminates any remaining financial burden from your lender. Without GAP coverage, you would owe that $4,000, even though the car is gone.
When Should You Get GAP Coverage?
GAP coverage can make sense in certain circumstances. Here are some scenarios where GAP coverage may be a good idea:
- High loan-to-value ratio. If you finance most of the cost of the vehicle, then the loan amount is likely to be more than the car is worth in the first couple of years after purchase. GAP coverage will cover that difference for you in case of total loss.
- Rapidly depreciating cars. Certain vehicles depreciate faster than others, such as most luxury and obscure vehicles. GAP coverage can give you peace of mind when making this type of purchase.
- Long-term loans. If you choose a long-term loan of 60 months (five years) or more, you may benefit from lower monthly payments, but it’s also more likely that your loan balance will exceed the car’s value over time. GAP coverage can bridge the gap until the loan and market value are more in-line.
- Leased cars. GAP insurance is almost always a lease requirement because it safeguards the leasing company as well as the customer. Even if it’s not required, GAP coverage is especially beneficial for lessees, because the residual value on leases can lead to significant gaps in the value of the vehicle and the remaining balance to purchase it.
Should You Buy GAP Coverage?
Ultimately, GAP coverage is an optional form of insurance, but it offers significant value for car buyers in specific situations. It’s often a relatively small addition to your insurance policy, especially when compared to the cost of paying off a loan on a totaled car. For drivers who don’t want to risk being left with a hefty bill after an accident, GAP coverage can be a smart choice.
Seek the Help of a Car Accident Lawyer
If you or a loved one was injured in a collision because of the negligence of another, contact a personal injury lawyer to discuss your legal rights. Let an experienced car accident attorney fight for the full compensation that you deserve. It is not uncommon to receive a settlement from the insurance company that is five to ten times larger with the help of a lawyer. Call the personal injury lawyers at Tario & Associates, P.S. in Bellingham, WA today for a FREE consultation! We have been representing people injured in Whatcom County, Skagit County, Island County, and Snohomish County since 1979. You will pay nothing up front and no attorney fees at all unless we recover damages for you!
