GAP Waiver Insurance, and Why Bad Credit Car Buyers Need It

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Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.


, - July 24, 2019

GAP (guaranteed asset protection) waiver insurance is one of the most important pieces of coverage you can have included with your insurance policy when you're financing a car. Why? Because it gives you coverage you'd otherwise lack – no other insurance policy does what GAP can do.

What Is GAP Waiver Insurance?

If your vehicle is stolen or totaled in an accident, and you owe more on your loan than the car is worth (known as negative equity), GAP waiver insurance covers that difference.

Even if you had full coverage auto insurance, which you're required to carry as a borrower, your policy would only pay the actual cash value of the vehicle at the time of the incident without GAP. This leaves you stuck paying off the loan on a car you no longer have.

What Causes Negative Equity?

If you're thinking that it just makes sense to have equity in your vehicle, you're right, it does. The problem is that it takes a lot of work to get there. There are a lot of things that can put you in a negative equity position right from the start of your auto loan.

Let's look at a few ways people can end up being upside down:

  • When you get a new car, it begins to depreciate as soon as you drive it off the lot. Vehicles lose their biggest chunk of value during the first year of ownership, generally losing around 20%. They see another drop (though not as steep) between years three and five, usually losing about 10% of their value each year. Since cars continue to depreciate, it can be difficult to establish equity – where the vehicle is worth more than what you owe on its loan.
  • You rolled over the negative equity from your last loan. You can trade in a car with negative equity, and instead of paying the difference, a lender may allow you to roll over the difference into your new loan. This starts you out with more negative equity than you should have had.
  • You made a minimal down payment that didn't cover the initial depreciation of the vehicle. Making a down payment of at least 20% of the car's selling price helps you combat being underwater. With bad credit, however, most lenders typically only require a 10% down payment or $1,000, whichever is less.

These are all situations that can put you into negative equity territory, where GAP insurance comes into play in the event of a total vehicle loss.

Why Bad Credit Car Buyers Need GAP Insurance

Having a car insurance policy that can cover the entire amount owed on your loan is especially important because the cost of replacing a vehicle is typically higher for bad credit car buyers.

When you're struggling with poor credit, your chances of getting an auto loan are better if you go through a subprime lender. These lenders almost always require a down payment, which can be especially difficult to come up with if you're still paying off a totaled vehicle. Additionally, bad credit car buyers typically find themselves facing a higher than average interest rate, which also increases the cost of your auto loan.

GAP can often be bought from your car insurance provider, and is sometimes offered by a third party right at the dealership. If you choose to purchase this through your dealer, they can often roll the cost right into your loan.

Be aware, however, that you're then paying interest charges on it. Also, it can be more difficult to remove your coverage if you find you no longer need or want GAP when it's rolled into an auto loan.

Need to Find a Vehicle?

If you've suffered a total loss and need another vehicle but are afraid of your credit holding you back, we can help. For over 20 years, CarsDirect has been helping bad credit car buyers find local dealerships that are signed up with the right lenders.

We want to help you, too. Simply fill out our auto loan request form to get started on your way toward bad credit auto financing today!

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Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.


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