GAP Waiver vs. GAP Insurance

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Megan Foukes is a recent graduate from Indiana University who graduated with a bachelor’s in journalism. Megan works as a content writer for Auto Credit Express and contributes to several automotive and finance blogs.

, - January 16, 2020

When financing a new car, the option to have GAP insurance or a GAP waiver should be something to consider. It’s better to be safe than sorry, and if your vehicle gets totaled, GAP insurance or a GAP waiver is there to protect you from extensive costs.

GAP Waiver

GAP waivers are agreements made between borrowers and lenders which waive the borrower’s obligation to pay the difference between the car’s actual cash value (ACV) and the remaining balance of the loan in case of a total loss.

They're typically built into a lease agreement, and sometimes a loan contract, and can only be obtained through a finance company.

GAP Insurance

On the flip side, if a GAP waiver isn’t a part of the contract, and you want this type of coverage, you need to purchase GAP insurance. GAP insurance is paid by the borrower and provides coverage for the difference between the ACV of a vehicle at the time of total loss and the amount owed on the loan.

While this may sound exactly like a GAP waiver, GAP insurance is an outside product that's available through a licensed insurance agent or broker.

GAP Coverage and Peace of Mind

GAP insurance isn’t necessary, and increases the overall cost of car buying, but it could be worth it to some borrowers who want that peace of mind, especially if they decided to purchase a new car. GAP insurance protects you from the immediate depreciation when you drive off the lot, and continues to cover the difference until there’s equity.

In the event that the vehicle is totaled and the loan balance exceeds the car’s value, GAP insurance is there to help. If you’re unsure about whether or not the peace of mind is worth it, let’s take a look at a scenario where GAP coverage helps:

Molly bought a new vehicle for $20,000 and chose to finance it for five years. Four months after buying the car, it was totaled in an accident and declared a total loss. Her insurance company cut her a check for the ACV, but it was $3,000 less than the remaining balance on her loan.

The immediate depreciation of her vehicle caused its value to drop at a higher rate than she was able to pay down the loan. Without GAP insurance, Molly is still on the hook for that $3,000, even though she can no longer drive that car. She would either have to continue making the monthly payment until it's taken care of, or pay it off in a lump sum.

If Molly took out GAP insurance when she financed her vehicle, the insurance company would have paid the difference between the insurance settlement and the balance owed on her auto loan. She wouldn’t have to pay for a car that isn’t drivable anymore, and could finance another vehicle.

The Bottom Line

GAP insurance and a GAP waiver aren’t the same thing, but they both offer peace of mind to buyers who want to be protected against unforeseen events.

We understand that owning a car can be expensive. Not everyone can afford GAP insurance, which can be stressful if something were to happen to a vehicle. If you’re interested in an auto warranty, our trusted partner can assist you here.

If you’re simply looking for a car loan but aren’t sure where to start the journey, CarsDirect can help with that. We've teamed up with special finance dealerships across the country that have the lending resources to help consumers in all types of credit situations. Get started today by filling out our cost- and obligation-free auto loan request form.

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Megan Foukes is a recent graduate from Indiana University who graduated with a bachelor’s in journalism. Megan works as a content writer for Auto Credit Express and contributes to several automotive and finance blogs.

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