What Is Gap Insurance And When Is It Helpful?
Dealing with the aftermath of a wreck is stressful. Hopefully, you will never experience this in your life; however, it is never a bad idea to take measures to protect yourself. One of the measures you can take is purchasing guaranteed auto protection (GAP) insurance.GAP insurance is an optional car insurance coverage that comes into play if your vehicle is totaled in a collision or stolen and the total loss value (or Kelley Blue Book value) of your vehicle is less than what you owe on the vehicle.
When a vehicle is totaled in a wreck or stolen, people are often surprised to learn that the at-fault driver’s insurance company or your insurance company is not responsible for paying off the loan on the vehicle. In North Carolina and South Carolina, a vehicle is deemed to be a total loss if the cost of repairing the vehicle, including parts and labor, is 75% or more of the vehicle’s fair market value.
The at-fault driver’s insurance company (if you are in a wreck and your vehicle is totaled) or your insurance company (if your vehicle is stolen) are only responsible for paying the fair market value of your vehicle in the moments before the wreck occurred or your vehicle was stolen. The fair market value of your vehicle can be less than the amount of your car loan. This is why it is very important to consider purchasing GAP insurance when you are purchasing a new or new-to-you vehicle and you plan to finance the purchase and will not be putting down a large down payment.
Why do you want GAP insurance?
If you are financing the purchase of your new or used vehicle and you are putting down a small down payment, the amount of your loan will exceed the resale value or total loss value of your vehicle (this is also known as being upside down on your car loan). Additionally, if you are purchasing a new vehicle, it will start depreciating the moment you drive it off the lot. The value of the average new vehicle drops around 25% during the first year of ownership and then continues to depreciate from there.This depreciation further exacerbates the difference between what you owe on your loan and theresale value of your vehicle.
What are the potential consequences of being upside down on your car loan if you do not have GAP insurance?
If your car is totaled in a collision or stolen and the total loss value is less than what you owe on your loan, you will end up owing money on a vehicle you cannot drive or no longer have if you do not have GAP insurance.
How does GAP insurance protect you when you are upside down on your car loan?
If you have GAP insurance, it will kick in and fill the gap between what you owe on your car loan and what the at-fault driver’s insurance company or your insurance company pays out for the total loss value of your vehicle.
An Example of how GAP insurance works:
Let’s say you purchase a vehicle with a sticker price of $36,000. You put $2,000 down and finance the remaining $34,000. Several months after purchasing your new vehicle, you are in a collision and your vehicle is totaled. At the time of the collision, your vehicle’s value has depreciated, and the resale value is only $30,000. The at-fault driver’s insurance company will pay you $30,000 for your vehicle, but you will still owe the $4,000 difference between what the at-fault driver’s insurance company paid you and what you owe on the loan. If you have GAP insurance, your GAP insurance will pay the $4,000 difference. If you do not have GAP insurance, you will be personally responsible for paying the remaining $4,000 on the loan.
How do you get GAP insurance?
You can purchase GAP insurance through your auto insurance company, or you can purchase it directly from the dealership. The rates may vary, so be sure to get quotes from both your auto insurance company and the dealership before deciding who to purchase it from.
Are there times when you do not need GAP insurance?
Yes, if you put down a large down payment and the amount of your loan is less than the resale value of your vehicle then you do not need GAP insurance. Additionally, if you need GAP insurance when you first purchase your vehicle, that does not mean you will need GAP insurance over the entire life of your car loan. Once you have paid your loan down so that the resale value of your vehicle exceeds the remaining amount of your loan, you no longer need GAP insurance.