GAP insurance is one of many pieces of the puzzle when it comes to having an auto loan. It helps make sure a borrower is insured for any possibility, including lender repayment after vehicle loss.
What Is GAP Insurance?
In the event of a totaled or stolen vehicle, guaranteed asset protection (GAP) insurance, as its name implies, covers the “gap” borrowers encounter between their full coverage insurance and the amount owed on a loan.
During financing, all borrowers have to carry full coverage insurance, but it typically only covers the actual cash value of the vehicle, not the loan balance. GAP insurance saves buyers the additional blow to their pocketbook of repaying a lender for a vehicle they can no longer drive.
When Is GAP Insurance Used?
In the event of a total loss, borrowers are likely to still owe their lender, especially when a vehicle has negative equity (more owed on the car than it’s worth). This is where GAP insurance can help.
It can be especially helpful when:
- A borrower has negative equity from a previous loan rolled into their current one. This means they’re likely to be even further underwater from the start, and could potentially owe that amount and more.
- The buyer opted for a small down payment. A substantial down payment (at least 20 percent) has the ability to stave off some of the equity loss caused by initial depreciation, which happens as soon as a new vehicle leaves the sales lot.
- A buyer has opted for a long-term loan. This leaves a borrower upside down longer, increasing the chance of having more to pay a lender in the event of a total loss.
- A vehicle has lost value quickly due to excessive wear and tear or mileage. The larger the difference between the value of the vehicle and the amount owed to a lender, the more money a borrower has to pay back, even if the car is long gone.
How is GAP Insurance Purchased?
GAP insurance is usually available for newer cars, and purchased through third-party companies, dealerships, or a borrower’s auto insurance provider. Before rushing into the coverage, it’s best to rate shop before purchasing GAP insurance.
Typically, GAP insurance rolls into the loan if purchased through a dealership. In this case, potential buyers may face difficulty removing unwanted coverage, or face higher costs because the borrower ends up paying interest on the coverage.
Closing the Gap
No matter what situation has put you underwater, make sure you have GAP coverage in case the unthinkable happens. Being well insured for any possibility, including the difference between the market value of your vehicle and what you owe your lender, is always the best bet.
If an unfortunate accident or loss of vehicle has left you wondering where to turn due to poor credit, CarsDirect wants to help. We work with an extensive network of special finance dealers that have the lending resources available to help people who are dealing with poor credit. It’s free of cost and obligation, so what are you waiting for? Simply fill out our auto loan request form to get started today!