Gap Insurance 101
What is Gap Insurance and What Does it Cover?
By Jack Estrada
Finance Director & Co-General Manager
Auto House Tempe
When financing a new or used car, saying yes to gap insurance can be a lifesaver one day. Some will skip gap coverage, thinking it’s just another upsell. But what is gap insurance and what does it cover? Is gap insurance worth it? Do I really need it? These are all common questions. Let’s get down to the basic information we always share with our customers, starting with “you’ll remember this one day if you need gap insurance.” Whether they said yes or no to coverage, they always remember.
What is GAP Insurance?
Gap insurance stands for Guaranteed Asset Protection. Sometimes it’s called loan/lease payoff insurance. Depreciation is the biggest reason to say yes to gap insurance, especially if the vehicle is a new or a newer pre-owned model that’s financed or leased. If your new car is totaled within the first few years, you could end up owing the bank a lot more than what your car is worth. Gap insurance covers the difference.
What Does Gap Insurance Cover That Regular Auto Insurance Doesn’t?
In the event of a total loss of the vehicle, your auto insurer will cover the claim—minus your deductible—so that you can replace your vehicle. Sounds great, right? Here’s the problem: the maximum any insurer will pay you or your lender is the actual cash value (ACV) of your vehicle at the time of loss. With a newer car that’s less than five years old and financed, that money “gap” (another reason why it’s called “gap” insurance!) could be a lot wider than you think. Without gap insurance, you are responsible for paying the remainder of the loan balance. This is where gap insurance kicks in to protect you – it will cover the difference between what your insurer is paying (the ACV) and what you actually owe on the vehicle (the balance of your auto loan).
Is Gap Insurance Worth It?
Absolutely! As soon as you drive a car off the lot, its value starts depreciating. For new cars, the biggest depreciation occurs in the first five years of ownership. According to Edmunds.com, at the end of five years, the average vehicle retains only 37 percent of its original value. Of course, this is not true for all makes and models as some will depreciate less over the years, but it is an eye-opener.
Who Should Have Gap Insurance?
Outside of car payments, two of the largest expenses related to owning a vehicle are insurance and vehicle depreciation. If you’re buying or leasing a new vehicle or a late model pre-owned car, it makes sense to have gap insurance. Whether vandalized, stolen, or totaled in an accident (no matter whose fault), having gap insurance gives you peace of mind.
How Much is Gap Insurance?
Depending on the term of the loan and the interest rate, gap insurance averages less than $10 per month. We offer gap insurance to all of our clients who purchase a new or pre-owned vehicle, whether it’s financed through Auto House or not, plus you always can add it within 30 days of your initial sale.
So remember if you’re financing your car, gap insurance offers great value and peace of mind for the future of your new ride, and if you’re a cash buyer, you won’t need it. No pressure. No upsells, just great cars at great prices. That’s how we roll at Auto House.