GAP Insurance, also referred to as GAP Waiver or GAP Addendum, is an abbreviation for Guaranteed Asset Protection.
In the event that your vehicle is declared a total loss, from accident, theft, flood, fire, etc. you could be held responsible for the deficiency between your insurance company settlement and the balance due to the lender of your negative equity auto loan.
[Read: 10 ways to avoid negative equity.]
In other words, you could have to come out of pocket for thousands of dollars to pay off a vehicle that is totaled and you no longer have possession of.
What a GAP policy does is pay the difference between the ACV (Actual Cash Value), what your insurance company declares your vehicle is worth, and what is owed to the lender that you have your auto loan with. In other words, they will pay the "GAP" between the two.
So who are the prime candidates for this coverage? I have found the candidates for GAP Insurance will fall into one of six categories and I will cover one below to use as an example.
Let's say that you've just purchased a brand new vehicle (brand new vehicles are one of the top reasons to have GAP coverage) for $30,000 with no money down. With T,T&L included you will be financing $32,250.
You couldn't be happier with your new vehicle and can't wait to show it off to all your family and friends. I hate to break it to you, but once you drove your new vehicle off the lot it became a used vehicle and your "not so new" vehicle just lost 20-30% of it's value.
That's typical depreciation for the first year of a new vehicle. You can expect another 15-20% in the second year and 10-15% in your third year. So immediately your vehicle is now only worth, let's use the 20% from above, $24,000 and you owe $32,250.
Let's say, one year after buying your vehicle it is stolen and your insurance company has given up on finding it. They are now declaring your vehicle a total loss.
"I'm sorry, I know
how much you liked that car."
In that one year period you've been able to pay down your loan to $31,000, but it's only worth $24,000, which leaves you with a $7,000 GAP plus your insurance deductible, let's say $500.
The total amount that you are now required to pay the bank and your insurance company is $7,500. That's right you have to come out of pocket to pay the balance owed on a vehicle you can't even drive anymore. OUCH!
What happens if you can't pay, or even refuse to pay? Eventually the bank will send your account to collections and then the account will eventually be charged off. What does this look like to future lenders?
It will show as a charged off auto loan and will look as bad as a repossession on your credit.
It shouldn't cost that much to buy GAP Insurance and should be available at most any car dealership throughout the country.
Make sure you are not being over charged! Car dealers know how popular GAP Insurance has become and are starting to charge top dollar for it.
Be sure to check with your insurance company and know what they will and will not cover. If you assume your covered, when you are not, and the worst happens, you are going to be in for a rude awakening.
If they don't offer GAP or a total loss replacement coverage, then check with some different auto insurance companies. It's free to get auto insurance quotes.
There are also several different benefits that GAP Insurance coverages will have and what benefits are available will vary between companies.
You'll definitely want to know what these benefits are, because it can make a big difference if you ever have to file GAP Insurance claim.