Introduction to Gap Insurance
Let’s say you just bought a brand-new vehicle and you are still making monthly payments for it. You might get a nasty surprise in the form of vehicle depreciation. Your vehicle begins to lose value the moment you drive it off the premises. In the event of an accident where the vehicle gets totaled, there’s a possibility of getting paid far less than what is owed on the loan for the vehicle. This is where gap insurance comes to the rescue, functioning like a safety net for your finances.
What is Gap Insurance?
Gap Insurance (the abbreviation for Guaranteed Asset Protection insurance) is a form of insurance that takes care of paying off the loan gap that exists between what the car is valued and what is owed on it post an accident or theft. In absence of Gap Insurance, you might find yourself paying thousands for a vehicle that you cannot drive.
Why Do Drivers Need It?
Let us assume you purchase a vehicle for $30,000. There is a possibility the market value would fall to $24,000 a year later. In case of it getting totaled, a standard insurance would pay $24,000 but, if $28,000 is still owed, an additional $4,000 would need to be paid. Gap Insurance is designed to manage finances in such scenario.
How Gap Insurance Works
The Gap Clarified
The gap is the differentiation between the market worth of your automobile and the outstanding balance of your auto loan or lease. This gap can be bridged because the automobiles depreciate at a very fast rate.
When Does It Kick In?
With gap insurance, it only becomes relevant when your vehicle is declared a total loss or is stolen and remains unaccounted for. It is not able to pay for any repairs or maintenance as it only focuses on the financial gap.
Average Cost Of Gap Insurance
Monthly and Annual Price Ranges
The average price for these services is:
- An insurance company quote of 5 to 10 a month (close to 60 to 120 every year)
- A dealership quote of a 400 to 700 one off fee that will be embedded in your loan or lease payments.
Cost Variations By Provider
A dealership would always be more expensive because the dealers bundle insurance into the vehicle financing, making it more expensive with interest. Insurance companies, on the other hand, would provide the lowest rate as it just gets added to your existing policy.
Other considerations for gap insurance pricing
The Car You Drive
Owning a luxury or sports vehicle comes with its own set of perks—but be ready for higher gap insurance rates. An economy vehicle is less expensive and easier to insure.
Terms of Your Lease and Loan
With longer loan durations, lower upfront payments tend to also come with higher premiums. The gap between what your vehicle is worth and what you owe is what dictates your premiums.
Other Insurance Companies
Not all insurance providers operate with the same set rules for pricing gap insurance. Some providers use a base price for all cars. Others, however, will use parameters like the make, model, and age of the vehicle to further customize their pricing.
Your Area
If you live in a region where the rates of accidents or theft are prevalent, then you should expect a higher premium for your gap insurance.
Gap Insurance from Dealership vs. Insurance Company
Pros and Cons of Buying from a Dealership
Pros:
- Adds convenience during the financing process
- May be included in lease arrangements
Cons:
- Charges tend to be higher
- It could potentially result in accruing interest
Pros and Cons of Buying from Your Insurer
Pros:
- Typically a lower cost option
- Is more flexible and can be removed or added any time
Cons:
- Has to be requested
- Not all insurance companies provide it
Is Gap Insurance Worth the Cost?
Situations Where You Might Need It
- Your down payment is less than 20%.
- For an extended auto loan (greater than 60 months).
- In the case of car leasing.
- For certain car models that lose value quickly.
When It’s Probably Not Necessary
Gap insurance is not likely to be advantageous if the vehicle is owned outright (no loan), a substantial down payment was made, or if the remaining car loan amount is less than the vehicle’s market value.
How to Save Money on Gap Insurance
Shop Around for Quotes
Compare the dealership’s quote with your auto insurer’s and even credit unions, they tend to have better value.
Bundle with Your Auto Policy
Many insurers will provide a better deal if you add gap coverage to your existing policy.
Cancel When You No Longer Need It
You can remove gap insurance once your loan balance dips below the market value of your car, which helps you cut your costs.
Alternatives to Gap Insurance
Loan/Lease Payoff Coverage
This is sometimes included as a standard policy feature or can be purchased as an optional add-on. It functions like gap insurance, but may have a lower coverage limit.
Emergency Savings Fund
For those who can exercise financial discipline, a self-insurance option involves maintaining an emergency savings account to manage any potential shortfall on the loan.
Common Misconceptions About Gap Insurance
It’s Not the Same as Comprehensive or Collision Coverage
Gap insurance will not repair your vehicle. It only settles the unpaid balance on your loan post standard coverage payment.
It Doesn’t Cover Mechanical Breakdowns
Gap insurance has no bearing on mechanical failures of a vehicle, such as an engine or transmission failure. These are the domain of warranties or service contracts.
Steps to Buy Gap Insurance
From Your Insurance Company
Reach out to your insurance provider to get a quote for gap coverage. Most insurers can add the coverage to your policy immediately.
From a Bank or Credit Union
If a bank or a credit union financed your vehicle, they are likely to provide gap insurance at a more reasonable cost than other providers.
Online Providers
Standalone gap insurance is available for purchase on the internet through several providers, making it easier for those whose current insurance providers do not offer it.
Conclusion
While it may seem like another cost associated with owning a vehicle, gap insurance can help avoid a significant financial burden. If you are leasing or financing a vehicle, particularly a new one, then getting a quote is certainly recommended. Just be mindful that the cheapest option is not necessarily the one the dealership recommends. Check multiple options, and eliminate coverage as soon as it is no longer needed.
If you’re exploring different types of insurance and their impact on out-of-pocket costs, you might also wonder how much is Invisalign without insurance or how much do braces cost with insurance. Understanding these can give you a clearer picture of how insurance coverage affects overall expenses—just like with gap insurance.
FAQs About GAP Insurance
How much does gap insurance cost per month?
Monthly payments through an insurance company range from 5–10. Many dealerships charge a flat rate of 400–700 for gap insurance.
Does gap insurance cover theft?
Definitely. If your car is stolen and not recovered, gap insurance will pay the remaining balance on the loan, less any payment from your regular insurance.
Can I buy gap insurance after purchasing my car?
Of course. The majority of insurance providers will let you add gap coverage within the first few years of ownership.
Is Gap Insurance Required by Law?
Not required by law, however, certain lease terms might stipulate its necessity.
When to Cancel Your Gap Insurance?
Cancel it once your loan balance is less than or equal to your vehicle’s market value.
