Auto Finance Tips
Low or No Money Down? You Need GAP Insurance
A Small Fee Can Save You Big if Your Car Is Totaled or Stolen
By Joanne Helperin, Senior Features Editor
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If your car is stolen or totaled in an accident, will your insurance company repay you for the total amount? For most people, the answer is maybe. Depending on how you financed your car, you may also need a relatively little-known form of coverage called GAP (guaranteed auto protection) insurance to pay off the full amount of your loan.
GAP insurance covers the gap, or difference, between your car's actual value and what you still owe on it. A one-time payment of a few hundred dollars for GAP insurance could save you thousands if your car is totaled or stolen in its first few years of ownership, or at any time during a lease.
Why do you need it? Your car depreciates about 20 percent as soon as you drive it off the lot, and it continues to depreciate significantly for the first two or three years. If your car were to be stolen or totaled during this time, insurance would pay you the actual cash value (ACV) of your car. Your loan amount could be significantly more, however, leaving you on the hook for the difference. (To see the five-year depreciation schedule for any new or used car, check out Edmunds' True Cost to Own.)
For example, if you pay $20,000 for a new car and a year later it gets totaled, you still owe the lender $17,000. Post accident, your insurance company tells you that the car's ACV is only $14,000. In the end, the insurance pays only $14,000, leaving you with a $3,000 debt to the lender. Unless you have GAP insurance, you'll have to break a lot of piggy banks to pay that difference.
Who Needs GAP Coverage?
GAP coverage is highly recommended on a new car for consumers who:
· Make a down payment of less than 20 percent
· Roll negative equity from a previous car loan into a new car loan
· Finance for 72 months or more
· Finance a vehicle that depreciates very quickly (luxury, highly optioned, many domestic vehicles)
· Lease a vehicle
Anyone in these circumstances could be "upside down," meaning they owe more on the car than it is worth. Many car buyers aren't aware they're upside down until they're faced with the total loss of their vehicle.
Fortunately, most lease contracts already include GAP coverage, but check to be sure it's in the lease agreement. Your existing auto insurance policy may also pay off the "fully financed amount," provide "full replacement cost" or "new car replacement" if your car is stolen or totaled; if so, then you don't need to buy GAP coverage. But be sure to read the terms and conditions of your primary (main) auto policy — there may be time or mileage limits on its GAP coverage.
Types of Coverage
Although it can go by various names, GAP coverage is generally divided into three categories:
GAP Insurance can be offered only by a licensed agent. Several major insurance companies don't offer GAP insurance at all, but others will offer you GAP coverage even if they don't hold your primary auto policy. Check with the dealer where you bought your vehicle to see if they offer it.
GAP Waiver is an agreement between a dealer or lender (bank, credit union, automaker's financial arm) and a borrower (you) to waive the difference between the ACV and the loan balance. The waiver should be backed by an actual insurance policy. Bear in mind that if you add a GAP waiver payment to your auto loan, you'll also be paying interest on it.
GAP Endorsement — If your primary auto insurance policy doesn't include a provision to cover the gap, your insurance company may be able to add a rider, or amendment, to include it in the policy.
Some insurance companies offer "loan/lease payoff coverage." This is different from insurance because it pays out only a fixed percentage of the ACV, so it won't cover the gap.
Coverage Cost and Cancellation
The cost of GAP insurance depends on a variety of factors, and it is important to comparison-shop for the policy to get a good price. If you're purchasing the insurance at the dealership, keep in mind that the prices are often negotiable.
GAP coverage generally lasts for the life of the loan unless you cancel it. GAP insurance and endorsements can be cancelled if you no longer need the coverage, just like any other part of your insurance policy. For GAP waivers, it depends on your state. Some states don't allow cancellation after 30 or 60 days, while others allow you to cancel any time during the loan and will even apply a prorated refund to your outstanding balance. For cancellation details, ask the salesperson or your state's insurance department.
When Can You Get Coverage?
It's smart to buy GAP coverage as soon as you purchase a vehicle. However, you can still buy GAP insurance up to 12 months (or sometimes 15,000 miles) later.
