I could not hide my joy when I finally bought a Lexus RX 330 on my 19th birthday. What would be a beautiful story ended sooner than I expected when I hit a tree to avoid hitting a deer. I confidently took the car to the mechanic and hoped the insurance would take care of everything. My nightmare officially began when the mechanic said my car was totaled and my insurance was insufficient to pay the loan balance. At this point, I realized GAP insurance would have saved me my troubles.
What is GAP Insurance?
Upon purchasing a new car through loan or lease, you might have a lot of questions. One question you might have is what is GAP insurance? Your lender will need you to have comprehensive or collision coverage. These packages will cover the damages on the vehicle up to its actual cash value (ACV). However, most car dealers will always try to sell you GAP insurance. Although it is optional, this cover comes in handy after theft or an incident that renders your vehicle completely totaled.
The guaranteed asset protection (GAP) insurance helps to cover the variance between the ACV and how much you owe your bank. The ACV accounts for the actual market value of similar cars within your area under the same insurance cover and interior and exterior damages of your car, among other factors.
The GAP insurance saves you the money you will otherwise pay out of pocket if your loan is more considerable than comprehensive and collision covers. Whether your vehicle is totaled or stolen, you automatically lose the equity you had on it. Therefore, it implies that you will immediately need to pay the car loan out-of-pocket as your insurance will not cover the deductible and pending loan balance.
Essential Features of a GAP Insurance
- Some carriers may not have GAP insurance provisions for high-end luxury and sports cars.
- It is not a must for you to have comprehensive or collision coverage to have GAP insurance.
- A lump sum payment on your loan may attract a refund of the unutilized premium.
- If you didn’t have a GAP cover at the date of purchase and decide you want it now, you could have it provided you have not faced any loss.
- Generally, the GAP coverage has a cap of $25,000. Nonetheless, always confirm your policy for accurate figures.
- The original payment schedule guides compensation of the remaining balance in case you have suffered a loss.
- You will not benefit from GAP cover unless your vehicle has faced the total loss or if your car is valued equal to or more than what you owe your lender.
- Prolonged loans with over 72 months repayment schedules, big loans, partially amortized, or loans with balloon repayments may deter some carriers from underwriting your vehicle.
Why Do You Need GAP Insurance?
The moment your car leaves the vehicle yard, it begins to lose its value, otherwise called depreciation. As a new car owner, you will be surprised by the value your vehicle loses every year. Typically, most vehicles depreciate up to 30.5% in the first year. The depreciating factor is the principal shock that new car owners meet upon theft or the car being totaled.
If thieves steal your car after one year of ownership, your insurance company will pay thousands of dollars less than the car’s original price. The GAP insurance will help to offset the balance between the insurance payment and the money owed for the lease.
For example, if you total your car or it gets stolen with an existing insurance cover, you will make a comprehensive or collision claim depending on which applies. The insurance company will pay the ACV less deductible. For instance, if your car’s ACV is $20,000 and has a deductible of $3500, your insurance will pay a total of $16,500.
The GAP insurance helps you to pay the difference you owe in your lease or loan from the insurance payment. In the case above, suppose you owe the bank $30,000; the GAP cover will help you pay $10,000. It implies you will only need to cover the deductible out of pocket.
The bank will hold you responsible for paying off the outstanding loan amount if you do not have GAP insurance. Many leasing companies and lenders insist you have GAP insurance when buying a car. This action helps to cushion them from buyers who vanish after a stolen or totaled car.
Who Must Have A GAP Insurance?
GAP insurance is indeed absolutely optional; however, there are reasons why you need to consider this cover. Here are options where it is necessary to have GAP insurance:
When the lender or lease company requires you to have it – Some leasing companies or lenders require you to have GAP insurance before they finance your vehicle. The practice helps them to minimize the risk of borrowers who walk away after a vehicle collision or theft.
When your car loan is more than the present value of the vehicle, if your current loan calculations surpass your car’s actual cash value, GAP insurance is a good choice.
Car dealers with low down payments and the first couple of months free on loan make GAP cover worth every coin. Such incentives will give your car negative equity for many months to come.
Suppose your down payment is 20% less than the value of your car; GAP insurance is a brilliant choice over the first number of years. At this time, you should owe less on the vehicle than its ACV. Upon a wreck, the cover will make up for the balance between the insured value and what you owe your lenders.
What Is Not Included in GAP Insurance?
While the GAP insurance helps to offset part of your loan balance, it is good to understand what it excludes. Below are standard costs that GAP does not cover:
- The vehicle insurance deductible
- Late fees or overdue payments on your lease or loan
- Prolonged warranties
- Security deposits
- Balances brought forward from former loans or leases
- Penalties for high mileage or excessive use
- Credit card charges by the insurance associated with the loan
- The down payment amount for a new car
- Engine failures
- Injuries or medical expenses
- Repairs for occasional wear and tear
Where to Buy GAP Insurance
There are many places where you can buy the GAP insurance policy. For example, many vehicle insurance companies offer this type of coverage. However, many limit the kind of cars you can insure. Fortunately, you can obtain a GAP insurance cover hassle-free from Carputty.
The company will help to ensure you are back on your feet after suffering a total loss.
Some of the reasons you should consider Carputty include:
- Reimbursement of deductibles up to $1000
- No cap on the maximum claim amount
- Personalized claim process
- Payments from $5/month
- Zero claim discounts for mileage or vehicle conditions
The GAP cover is a life-saver if you have a new car and suffer a loss from theft or collision. It will save you the financial burden of keeping up with your loan or lease repayments. The GAP insurance is a must-have if your car loan is more significant than your vehicle’s ACV. The bigger the variance between your ACV and loan repayments, the more reasons you need to get a GAP cover.