Your new vehicle is your new pride and joy, even though you'll be paying monthly for the next five years. However, what happens if it is stolen or totaled in an accident? If your car is now worth less than the loan amount, which frequently happens on new cars, you could still owe on loan even after your auto insurance settlement—at least as long as you don't have GAP insurance!
Guaranteed Asset Protection (GAP) is an insurance policy that pays the difference between what your vehicle is currently worth and how much you owe on your car. Comprehensive and collision vehicle insurance only pays a car's value at the time of a loss, but, as mentioned, you may owe more on your auto loan or lease than the car is worth and have to come up with the money to pay off the loan. This is when GAP insurance can come to your rescue.
What are the values and costs?
Countless vehicles lose more than half their value during the first five years. Many new cars depreciate at least 20% in their first year. So if your $32,000 "new" auto is only worth $25,600 at the time of the accident or theft, but you owe $29,600, you could have to pay the lender $4,000 (plus the amount of your auto insurance deductible). GAP insurance would cover that $4,000 (but not the deductible).
GAP coverage is not expensive; on average, it costs about $60 a year. Some standalone policies charge a one-time fee. Variables that affect the cost of a GAP policy include:
- the actual cash value of your vehicle
- where you live
- the auto's age
- your previous claims history
Who needs a policy?
Auto insurance claims only cover the actual cash value of the vehicle. Accordingly, a GAP policy makes sense if:
- The down payment is small; you can be upside down on your loan the minute you leave the dealership.
- The vehicle is a model that depreciates faster than others; if you add a lot of miles per year, it will depreciate even faster.
- You have a long-term loan, such as a 5-year one; it will take a long time to build up equity on the car.
- The lender or lessor requires the insurance as part of your deal.
- You have a history of accidents, or your vehicle is more likely to be stolen (based on model or neighborhood).
You do not need GAP insurance if you own the car outright, made a substantial down payment, or your auto insurance policy includes "new car replacement" coverage, which fulfills the same need.
Making the right purchase and decisions
GAP insurance isn't for everyone. But it helps you avoid getting stuck with a costly mess should you need it.
Check whether you need it when purchasing or leasing a car. A respected large auto dealership, such as the Mike Duman Auto Superstore, can both help you find the right vehicle and help you assess whether purchasing a policy to fill in coverage gaps makes sense. They can even help you purchase it.
Contact us today to get on the road with the car you want and the protection you need.