How To Add Gap Insurance To Your Auto Loan

If you've leased or financed a automobile in the last 25 years, chances are y'all've carried GAP insurance. If you're thinking about leasing or taking out an auto loan, information technology's almost sure that the dealership volition try to sell you GAP insurance.

You may well demand the coverage, but y'all don't necessarily have to buy it from the car dealer. Before you select an auto insurance policy and add GAP insurance, here'due south what you demand to know.

Standard auto insurance policies won't pay out what yous paid for the machine. Instead, they cover the bodily cash value, or ACV, of the auto. Your insurance settlement volition exist the actual greenbacks value at that time, minus your car insurance deductible. For case, if they determine your car is worth $4,000 and you lot take a $500 deductible, your payout will be $3,500.

The discrepancy between the initial cost of a car and the depreciating worth is what ofttimes gives auto owners a nasty surprise: They owe more than what the car is worth. If their machine is totaled or stolen, the insurance visitor pays out essentially less than what they owe. Yous're on the claw for the difference — which could amount to thousands of dollars.

And you however accept to come up with a downwards payment and authorize for financing for a replacement vehicle so that y'all can get to work, get your kids to events and practise the basic tasks of daily living.

That's where GAP insurance comes in. GAP is an acronym for Guaranteed Asset Protection. Information technology covers the difference between the value of the motorcar and what you owe on it. If your car is totaled or stolen and you're "upside-downward" on the loan, you lot'll exist glad to accept GAP insurance.

The benefit isn't paid to you direct; it's paid to the finance company to pay off your loan or charter.

Average GAP claim

$iii,200 - $4,500

Average claim frequency

3% - five%

How It Works

Car Insurance

Specifics vary past carrier, only in general, GAP insurance works like this:

You purchase a brand-new auto for $25,000. You become in a wreck and the car is totaled. At the fourth dimension of the blow, you withal have a loan balance of $xx,000. Your standoff coverage would pay your lender up to the totaled automobile's depreciated value. If the motorcar has an actual cash value, later depreciation, of $18,000 at the fourth dimension of the wreck, you would accept to pay $2,000 in greenbacks to clear your loan. If you have GAP insurance, your insurer would assistance pay the $2,000.

If you have a $1,000 deductible, and your GAP insurance policy includes deductible coverage, they would pay an boosted $ane,000.

Here are other details nearly GAP insurance that you may detect useful:

In the event of a total loss, including theft, GAP insurance will pay the difference betwixt your vehicle's actual greenbacks value and the rest you owe. In some cases, they will also pay your deductible, so yous won't accept to pay out of pocket in the event your car is totaled.
Your payoff residuum is calculated as of the fourth dimension of the loss, using the loan's original payment schedule.
The coverage is capped: $25,000 is common, but check your policy's fine print for specifics.
GAP insurance provides no do good if your car is non a full loss, or if the car is worth at least what you lot owe on the loan.
Some vehicles, such as high-ticket luxury or sports cars, are non eligible for coverage at some carriers.
Some carriers won't underwrite cars with certain types of loans, including loans with airship payments, loans longer than 72 months, loans that are not fully amortized or very large loans.
Yous don't demand collision insurance or comprehensive coverage to accept GAP insurance.
If you pay a lump sum and cancel the policy, you may receive a refund of the unused premium.
If you don't take GAP insurance now and you decide you desire information technology, you can buy it at whatsoever fourth dimension from your insurance carrier or stand-alone GAP insurance provider — provided you haven't already suffered a loss.

Practise y'all need information technology? Well, that depends. The boilerplate new car will lose sixty% of its value within iii years of normal driving. Many cars lose around 30% later the first year, co-ordinate to Edmunds.com. After 3 to five years, you tin expect a car to be worth almost 40% of what it cost new. If you're a ride-share driver, or otherwise put a lot of miles on your vehicle, information technology'southward going to lose a lot more.

Furthermore, luxury sedans tend to lose value faster than other models, according to the 2019 Vehicle Depreciation Report from Black Book and Fitch Ratings.

GAP Insurance Claims Are Rising

GAP insurance is becoming more important to consumers as motorcar loan terms get longer and longer. Co-ordinate to data from Experian, the average term on a new-car loan is now a record 68 months. Further, 84-calendar month terms are becoming increasingly common. A growing number of people are fifty-fifty financing cars over 96 months.

In most cases, the longer the term, the lower the monthly loan payment — which means you're going to be upside downwardly for a longer period of time and drive more miles while you lot're upside downward.

That's why both the frequency and amount of GAP insurance claims are on the rise.

If you have a small down payment and a long loan, say, between a 36- and 96-month term, chances are you're going to be underwater for a long while. Y'all'll owe more on the car than it'south worth. And unless you can easily write a cheque for the difference, yous may need GAP insurance. In fact, most finance companies will crave it if they project that you'll owe more than the auto is worth in the beginning couple of years.

Should You lot Purchase GAP Insurance?

If the cost of having your machine totaled in the first few years you lot own or lease it will be a hardship for you, you should probably consider ownership GAP insurance.

The average GAP insurance claim these days is between $3,200 and $iv,500, says Tony Wanderon, president and CEO of National Machine Care in Ponte Vedra Beach, Florida. In contempo years, GAP insurance providers accept been taking underwriting losses. Claims are coming in higher and more than often than underwriters predicted when they gear up prices. Those statistics indicate that GAP insurance is mostly a good buy for consumers — if your dealer or finance visitor doesn't mark up the policy too much and hide it in your loan.

According to the Insurance Information Institute (III), GAP insurance is worth considering under the following circumstances:

Yous're buying a new or nearly new vehicle.
Yous're financing information technology for 60 months or longer.
You made a pocket-size down payment — or no down payment at all.
You rolled over negative disinterestedness from an onetime car to a new one.
You're buying a auto that depreciates faster than virtually.
You're planning to drive a lot of miles early on in the lease.
Your interest rate is high, which ways you build less equity in the early years of the loan, and you stay upside down longer.

You may want to skip the GAP coverage if:

You made a large down payment.
Your car loan term is 36 months or less.
You're paying the loan down ahead of schedule.
You tin easily afford the take a chance and would rather invest the money.

Leased Cars

Car leases unremarkably require some sort of GAP coverage. It's typically written into the charter agreement. This is called loan/lease coverage, and information technology's like GAP insurance. However, unlike nearly GAP insurance policies, loan/charter insurance policies ordinarily merely pay a pct of the actual cash value of the car.

Whom Should You Purchase From?

Every bit with all fiscal products, you should shop around for GAP insurance. Yous have 3 options:

Buy it from the car dealer or lender. This is typically a lump-sum premium. The dealer pays information technology for you lot, and and then rolls the premium toll into your loan, at your normal rate of interest.
Buy it from your own auto insurance company. This is typically a monthly or vi-month premium, and you won't be charged interest on information technology.
Buy it from a specialty GAP insurance carrier. This is typically for a lump-sum premium.

Dealer-sold GAP insurance is nigh always the nearly expensive option, by far. Dealer-sold premiums are often ii to 4 times those available from third-political party and stand-solitary insurance companies, according to Steve Lehto, a Michigan attorney specializing in automotive and lemon laws. However, if yous can handle the premium, dealer-sold GAP insurance may have some advantages:

Dealer-sold GAP coverage is more likely to be bachelor for negative equity rolled over from a prior loan — upwards to 150% of manufacturer suggested retail price (MSRP). Most insurance carriers won't offer this every bit an option.
Dealers may have higher coverage limits. If you're ownership an expensive vehicle and yous desire GAP insurance, y'all may have to buy information technology through the car dealer.
Dealer-sold policies may likewise cover your deductible, up to $1,000. Merely if yous store around, y'all may find insurance carriers have this selection, as well. Gap Directly, for instance, has this feature.
If your insurance carrier also carries your GAP insurance, they may be less likely to full your car — even though you'd be ameliorate off if they did.

Buying GAP insurance from your ain insurance carrier has the advantage of a lower premium. If y'all add together GAP coverage to your collision and comprehensive auto insurance policy, your premiums may be as low as $twenty per twelvemonth, according to the III.

Plus, since you're paying monthly, you can cancel the coverage equally soon as you're no longer upside downward on your loan. Y'all may not have this option with lump-sum policies, especially when the premium has been rolled into your loan.

Near consumer advocates recommend you refuse the dealer GAP coverage and compare quotes from your own insurance carrier or from a stand-alone GAP insurance vendor.

"Your insurance company will sell you GAP insurance for far less than what your dealer will exercise," says Ari Janessian, CEO and founder of Boston Automotive Consulting. "I encourage you to negotiate the heck out of information technology," he says.

1 technique Janessian suggests is to get a GAP offer from your insurance company and see if the dealer will match it. This works better if you have a peachy interest rate.

Questions to Ask Before Y'all Buy

Couple discussing insurance

Buying or leasing a machine is a stressful experience for almost people. In add-on to figuring out your financing before you become shopping, consider what GAP insurance is best for you by answering these questions.

Does your GAP insurance cover the deductible?
What'southward the price as a percentage of the GAP? If y'all're expected gap is but a few g dollars, it doesn't brand sense to pay $800, and then pay interest on that by wrapping that amount into your loan.
Does the carrier pay claims? Bank check online reviews and Better Concern Bureau records to see if they have a history of claims problems.

The bottom line: GAP coverage may be a great idea if you are brusk on savings and if you can avoid having to buy it from the car dealer.

Nigh the Author

Jason Van Steenwyk is an experienced financial industry reporter and writer. He is a former staff reporter for Mutual Funds, and has been published in SeekingAlpha, Nasdaq.com, RealEstate.com, WealthManagement.com, Senior Market Advisor, Life and Health Pro and many other outlets over the past 2 decades. He is also an gorging fiddle player and guitarist. He lives in Orlando, Fla.