Everything you need to know about GAP insurance

couple reading about gap insurance

Bringing home a brand new or “brand new to you” car is always an exciting moment, but a whole set of new worries and responsibilities come right along with that new purchase. You now have a car payment to add to your monthly expenses, and actually seeing an extra several hundred dollars come out of your account each month can be jarring. If your last vehicle was a bit of a lemon and you’ve replaced it with a significantly nicer model, you might now be much more worried about getting into a fender bender, bumping a curb and scratching up your paint, or, heaven forbid, your car being stolen. And justifiably so!

Most drivers are at least vaguely aware that the value of a new car begins to drop, or depreciate, pretty drastically once it leaves the dealership. According to CARFAX, a new car usually loses at least 10% of its value just in the first month after purchase! In the first year of new ownership, the car will lose 20% of its value in total, and roughly 15% of its value for every year thereafter. If something happens to your car (i.e., it’s stolen or totaled in a wreck), GAP insurance can help make sure you aren’t stuck paying more than what your car is actually worth.

For a $50,000 car, here’s what a standard depreciation could look like, according to The Zebra:

depreciation example

What is GAP insurance?

GAP insurance, or guaranteed auto protection insurance, can pay the difference between your car’s depreciated value and what you actually owe on your auto loan if your car is wrecked or stolen. GAP insurance is always optional, but given how quickly the value of a vehicle depreciates, it’s also almost always a good idea.

When would I need GAP insurance?

As we mentioned above, GAP insurance protects your investment in the event of a car-related catastrophe, such as a major wreck, theft, or even some natural disasters. But everyone’s situation is unique. How can you determine whether GAP insurance is worth it for you? We’ve broken down the answer below.

You should consider purchasing GAP insurance if:

  1. Your down payment amounted to less than 20% of your car’s purchase price.
  2. Your loan or lease period is longer than 60 months.
  3. You were upside down, or had negative equity, on your last car loan. This means you owed more on your old car than it was actually worth at the time you traded it in. Many trade-ins involve an owner who is upside down on their loan.
  4. The specific make and model you’ve purchased generally depreciates more quickly than other makes and models do.
  5. If something were to happen to your car, you wouldn’t be able to afford to cover the difference between the actual value of your car and the balance of your loan or lease.
  6. You drive more than 15,000 miles a year on average. If this is the case, your car will depreciate more rapidly and you’re more at risk of a crash.

If you check some or all of the boxes listed above, it’s most likely in your best interest to purchase GAP insurance along with your new car. Without GAP insurance, you could potentially be left on the hook for thousands of dollars if something happens to your car. This is a situation where it’s better to be safe than sorry.

How does GAP insurance work?

To put things simply, GAP insurance goes into effect if something disastrous happens to your car and it’s written off as a total loss.

For example, say you purchased a new car for $25,000. Unfortunately, just a few months after you drove your new vehicle off the lot, you got into an accident and the car was completely totaled. You’re still on the hook for your monthly car payments, but due to depreciation, your car was only worth $20,000 at the time of the accident. In this situation, without GAP insurance, you’d still be stuck paying back the full $25,000 purchase price of your car. With GAP insurance, however, the difference of $5,000 would be covered.

GAP insurance also comes into play if your vehicle is stolen. If your car is written off as a total loss after a 30-day waiting period during which law enforcement is unable to recover your vehicle, your GAP insurance will come into effect to cover the difference between your car’s purchase price and its value at the time of the theft.

It’s worth noting, however, that the exact amount and details of GAP insurance varies state by state. As with any insurance, it’s important to go over your policy in detail with your provider.

Can you get GAP insurance after you buy a car?

In general, yes, you can get GAP insurance after you’ve already purchased your car, but you’ll want to do it within the first two to three years of owning the vehicle. This time frame is when you’re most likely to owe more than what your car is actually worth in the event of a total loss or theft. Additionally, in some cases, GAP insurance expires after a certain period of time because your car will no longer be worth less than the loan or lease balance.

Shopping for GAP insurance

Often, insurance providers actually include GAP insurance automatically when you take out your auto loan. Your first step if you’re thinking about purchasing GAP insurance is to check with your current insurance provider and make sure you don’t already have it.

If you do need to purchase GAP insurance, you can always go through your current provider, but it may be in your best interest to shop around before you make a decision. As with other types of insurance (and with pretty much anything you buy), you want to make sure you’re getting everything you need at the best price you can find.

If you decide to get your GAP insurance from your current provider, you’ll likely reap several significant benefits. For example, if something does happen to your car, you’d only need to file one claim, rather than filing one with your primary provider and another with your GAP insurance provider. Pretty convenient!

You also have the option to purchase your GAP insurance through the dealership, but beware: dealers are often incentivized to sell GAP insurance, so their rates will be much higher than those of a dedicated insurance provider. This higher coverage cost will likely be rolled into your monthly car payment, leaving you paying more out of pocket than if you had gotten your coverage elsewhere.

Regardless of where you get your GAP coverage, make sure you know exactly what it covers. Some GAP insurance policies will pay the difference between your car’s purchase price and its actual value no matter how great that difference is; others set limits on how much of a gap they’ll actually cover.

GAP insurance vs. loan lease payoff coverage

In your search for GAP insurance, you might also come across the term “loan/lease payoff coverage”. Loan/lease payoff coverage is another form of GAP coverage, but it differs in the amount that it pays. As mentioned above, not all forms of GAP coverage will pay for the full difference between your vehicle’s purchase price and its true value. Loan/lease payoff coverage is one of these types of GAP insurance. This is the type of coverage we offer at Elephant.

If you’re still not sure whether or not you need loan lease payoff coverage, check out our coverage wizard to find out for sure. Get a quote today!

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