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Is GAP Insurance Worth It? [Questions Answered]

If you’re in the market for a car, you may have heard of GAP insurance. It's a type of insurance offering financial protection in specific circumstances involving your vehicle's value and loan balance.

At Best Reward, we refer to this type of protection as GAP Plus Coverage. You may also be aware of the pros and cons of this type of supplementary coverage. We've answered some of the most frequently asked questions to help you decide if it’s an investment you want to make. 

Read on to learn how gap insurance works and whether or not you need it.

What Is GAP?

GAP stands for Guaranteed Asset Protection. To understand what it is and how it works, you need to know what happens to a new car's value when you drive it off the lot.

New cars depreciate—a lot. Within the first year of your new car's life, it may lose as much as 20% of its value. This means that early on in your car loan or lease, you may owe more than the vehicle's cash value or actual cash value (ACV).

Now, let’s say you’re in an accident and total the vehicle. If you’re in a position where you owe more than the car is worth, you’re in a very tight spot because insurance will only pay the vehicle's total value, not the amount you owe.

In this case, if you have GAP insurance, it will cover the gap between what you owe and how much the car is worth. This coverage ensures you can repay your loan fully and won’t be stuck making monthly payments on a totaled vehicle in the junkyard.

How Can Guaranteed Asset Protection Help Me?

GAP coverage helps in situations when your vehicle's value is less than what you owe on it and gets totaled in an accident. GAP ensures you do not face a financial shortfall if this should happen.

A totaled car with an outstanding loan can create a challenging financial scenario because you must deal with the debt from the wrecked vehicle and the need to buy new transportation. This combination of obligations can strain your finances and is more likely in these scenarios:

  • You made a small down payment on the car - the smaller the down payment, the more likely you will be upside-down on your car loan.
  • You have an exceptionally long loan term.
  • Your vehicle will depreciate extremely quickly - some car types depreciate faster than others.

This special type of insurance can provide critical financial protection if you total your new car after driving it off the lot. For example, you purchase a $30,000 vehicle but only put $2,000 as a down payment. You finance the remaining $28,000.

Within a year, that brand-new car has depreciated 20% and is now worth $24,000. If it gets totaled and your insurance pays out the current value of $24,000, you would still owe $4,000 on your loan - and GAP would cover that difference.

Consider a different scenario where you wreck a leased vehicle. You have a three-year lease at a value of $20,000. After one year, its value drops to $14,000, yet you still have $16,000 left to pay on the lease. If you total the car, GAP will cover the $2,000 difference between the insurance payout and what you owe on the lease.

GAP can be vital protection against taking a big financial loss. It will allow you to pay off loans/leases and get a replacement vehicle without added burden. It provides peace of mind against depreciation gaps that might otherwise leave you stuck owing thousands.

Is Gap Insurance Worth It?

Yes, it’s worth it for many people since it offers peace of mind and protects against major financial loss. This is especially helpful soon after buying your vehicle because, at that time, you might owe thousands more than its value if it gets totaled.

This risk is highest for loans with low down payments or long terms, where depreciation outstrips the principal paid. Though an extra cost, GAP provides a safety net to alleviate the major financial pitfalls of rapid depreciation.

When Does Gap Insurance Not Pay?

GAP does not pay out if the insurance company deems your vehicle a total loss and you do not carry comprehensive and collision coverage. GAP does not include costs beyond the difference between your loan balance and the car's value.

This means it does not cover missed loan payments or extra rental car costs. Additionally, it expires once you reach your principal loan balance.

Do I Need Gap Insurance If I Have Full Coverage?

Full coverage typically includes collision and comprehensive coverage. However, it may not fully protect you when your car's value rapidly decreases. GAP fills this gap to cover remaining loan balances even as cars depreciate quickly. The two policies work in tandem to cover different exposure risks.

Does Gap Insurance Cover Theft?

It does not typically cover theft. If your stolen car later turns up totaled from its journey through theft or illegal chop shops, Guaranteed Asset Protection may kick in. However, it’s irrelevant if your vehicle is still drivable or fixed. GAP insurance only helps if your car gets stolen and is a total loss.

What Happens If My Car Is Totaled?

GAP covers the difference between your loan balance and the car's insurance payout if your vehicle is declared a total loss. You are liable for discrepancies between the insurance payout and loan balance if you don't have it.

How Much Is Gap Insurance?

The cost of GAP insurance depends on where you get it. It’s typically more expensive at the dealership than through a financial institution. This secondary insurance costs around 5–6% of what you pay for your regular comprehensive auto insurance. This makes it extremely affordable. At Best Reward, GAP Plus Coverage is less than $400.00.

Where to Buy Gap Insurance?

Many auto lenders, dealerships, and financial institutions allow you to purchase GAP insurance. You also may be able to buy it during the loan process. Your car insurance company might also offer it at competitive rates.

It's also available from some insurance carriers as an add-on or stand-alone policy. Dealers sometimes include it in financing packages too. If you’re wondering how to get gap insurance, try shopping for the best rates customized to your coverage needs.

How Do I Know If I Have Gap Insurance?

Review your loan documentation for any mention of GAP coverage during purchase. If uncertain, call your lender because their records should note if you purchased it. Also, check insurance policy documents for add-ons related to loan/lease coverage shortfalls. Knowing exactly what existing protections you have is essential.

How to Tell If I Don’t Need Gap Coverage?

Your financial risk can be lower in certain situations. These include making a down payment of 20% or more and choosing a short loan term. Also, having good credit and selecting a vehicle that retains value helps reduce your exposure. However, standard lease protections may suffice if you just want coverage for a lease period and plan to trade in the car at the end of the lease.

Does Gap Cover Me If I'm At Fault?

Yes, GAP will pay even if you were at fault. However, just as in the examples above, your insurance company must declare your vehicle a total loss from an accident or incident for GAP insurance to apply.

Is Gap Required?

You typically do not need to carry it. However, there are situations where you might require it to safeguard your financial interests. Some lenders require GAP insurance as a way to protect not only themselves but also you in the case of an accident. But if you finance your auto loan through Best Reward, we do not require borrowers to secure GAP coverage.

How Long Is GAP Good For?

Depending on your policy, it may last for a specific term or the entire life of the car loan. GAP insurance mainly helps during the early part of your car loan when your debt is highest and your loan term is longer.

When GAP insurance has no fixed policy term, it’s important to track your car's owed amount and value. This helps you decide, as you’re nearing the end of the loan term, if you still need Guaranteed Asset Protection coverage.

Can I Get Gap After I Have Purchased My Vehicle?

This depends on the financial institution or company that you’re purchasing the vehicle from. Some require you to obtain coverage when buying the vehicle, while others are more flexible. At Best Reward, we allow members to get a quote for our GAP Plus Coverage - even after purchasing their vehicle.

We even offer GAP coverage for used vehicles, refinanced vehicles, motorcycles, boats, and RVs.

Benefits of Getting Gap Protection From Best Reward Federal Credit Union

Our GAP Plus Coverage provides peace of mind and ensures you're not left paying the difference on your vehicle loan if you total it in an accident. It also makes the transition to your next vehicle smoother by reducing that loan with us by $1,000.

Why take a chance? Don't let unexpected accidents leave you in a financial hole that will take years to pay off. Click below to explore the benefits of purchasing GAP coverage through Best Reward Federal Credit Union.

Learn More About GAP Insurance