When you’re buying or leasing a new car, the dealer might offer you something called GAP insurance. It’s an optional add-on, like extended warranties, and its cost gets rolled into your loan. Understanding what gap insurance covers is crucial to deciding if it’s right for you.
GAP insurance, or Guaranteed Asset Protection, is designed to cover the “gap” between what you still owe on your car loan and what your car is actually worth if it gets totaled or stolen. Vehicles, especially new ones, can depreciate in value quickly. If your car is declared a total loss due to an accident, theft, or natural disaster, your standard auto insurance will typically only pay out the current market value of the car. This payout might be less than the outstanding balance on your loan, leaving you to pay the difference out of pocket.
This is where GAP insurance steps in. It can cover this remaining loan balance after your car insurance pays out the vehicle’s actual cash value. For example, if you owe $20,000 on your car loan, but your car is only worth $15,000 at the time of a total loss, and your regular insurance pays $15,000, GAP insurance could potentially cover the $5,000 “gap”.
However, it’s important to know what GAP insurance doesn’t cover. It generally doesn’t cover things like engine failure, damage from wear and tear, or if you voluntarily surrender or trade in your vehicle. It’s specifically for total loss events.
The cost of GAP insurance can vary, and it’s wise to shop around. Your own car insurance company, direct lenders, or the dealership might offer it. Compare prices and coverage before you decide. If you finance GAP insurance into your loan, remember it increases your total loan amount and the interest you’ll pay over time.
You have the right to decline GAP insurance, especially if it’s presented as mandatory for financing – double-check your sales contract or with the lender directly. Also, if you sell, refinance, or pay off your car loan early, you may be entitled to a refund on the unused portion of your GAP insurance. Always remember, you can cancel optional add-on products like GAP insurance at any time to reduce your costs.
