So, you're now the proud owner of a new or lightly used car – congratulations! Except … hold on. You've been in an accident and the car is totaled. Or it's been stolen. What now? It's only been a year or two since you bought the car. Are you still responsible for making payments on it?
Not if you have guaranteed auto protection, or as it's more commonly known, GAP insurance. What is GAP insurance? We'll give you a hint: It's not a way of protecting your new pair of khakis.
The idea is simple. If you owe more than what your car is worth at the time on an accident or theft, GAP insurance will cover the difference between the car's depreciated value and what you actually owe on your auto loan. And it can be a big difference.
Most of us already know that the moment we drive a new car off a dealer's lot, it begins to lose value. But do you know how fast it depreciates? Edmunds reported that just two years after purchase, a car loses about 30 percent of its value. By the time four years is up, the car is worth half of what it was new.
Why GAP insurance matters
You may be wondering if GAP insurance is really worth it. After all, the coverage is optional. But consider this: Buying GAP insurance can help you avoid a crushing financial burden in the event of some disaster with your car. To put it simply, GAP insurance is essential for both leasing and financing, particularly if you have a high loan amount. Here's an idea why:
Let's say you purchase a car for $30,000. You do your research, compare car insurance quotes, and have the car fully insured with collision and comprehensive plans. But then, just a few months later, your car is totaled in an accident. Because value depreciates so quickly, the car's current cash value is only $25,000. GAP insurance makes up the $5,000 difference. It bridges the gap.
Something similar plays out for theft. After a 30-day waiting period (giving time for law enforcement to recover the vehicle), and assuming the car is written off as a total loss, GAP insurance goes into effect. It should be noted, however, that exact coverage differs from state to state, so it's a good idea to check with your provider.
GAP insurance is already included in nearly every lease contract, but it's incumbent upon the buyer to make sure. Assuring you have GAP coverage may actually may be more important than ever. That's because the recent rise in low- to no-down-payment car loans has made the role of GAP insurance all the more critical to protecting drivers in case of an accident or theft.
Shopping for GAP insurance
There are lots of insurance providers out there promising GAP coverage, but not all are created equal. A good first step in shopping for GAP insurance is reaching out to your current policy provider. Some companies offer the coverage as an add-on to your existing policy. Some just include it automatically. You won't know for sure until you check in.
Obtaining GAP insurance from your primary insurance company offers distinct advantages. For starters, you'll only have to file a single claim if your car ends up being a total loss, rather than filing one with your primary insurer and one with your GAP provider. But it may be a good idea to look around at rates anyway, to ensure you're getting the best deal.
Another option for buying GAP insurance is to get it at the dealership, though this is a riskier proposition. Dealers will roll the coverage into your monthly car payment, but at much higher cost than if you got the coverage on your own. That's because dealers will usually get some incentive for selling GAP insurance, setting their own (high) rate and passing the cost off to you.
No matter how you decide to obtain coverage, make sure you understand your policy's limits. Some GAP policies pay the difference between the car's value and the amount you owe on your loan no matter how big the "gap" is. Others limit the coverage to a specific percentage or dollar amount. Just make sure you know exactly what kind of GAP insurance you're getting.