What is Auto GAP Insurance and Should I Get It?
Auto GAP, sometimes called GAP insurance, helps pay off your car loan if you total your car and owe more on it than it’s worth. But the price tag can be expensive, usually a flat fee running between $300 and $1,000. Here, we’ll go over when you might need auto GAP, when you don’t and how to get a good deal.
- What is auto GAP insurance?
- How does auto GAP insurance work?
- Who needs auto GAP insurance?
- How can you get the best deal on auto GAP insurance?
- Alternatives to auto GAP insurance
What is auto GAP insurance?
GAP stands for guaranteed asset protection or guaranteed auto protection. If your car is significantly damaged in an accident or a weather event (flood, hail, fire, etc.), your insurance provider may consider it totalled, meaning the cost to repair the car exceeds its value. Your standard auto insurance policy would typically pay what your car is worth to your lender. But what if you owe more than what your car is worth? This is when auto GAP insurance kicks in and helps out.
Why would you owe more on your car than what it’s worth? You could owe more than what your car is worth if you didn’t give a down payment when you first bought it, especially on a new car, if you had negative equity from a trade-in, or the car’s depreciation has just exceeded how much you’ve paid on it, which is more likely to happen in a long-term car loan. We’ll talk more about how to avoid all of these situations a bit later.
How does auto GAP insurance work?
You may hear that there are two types of auto GAP — GAP waivers and GAP insurance. Waivers are an agreement with your lender and have a flat fee. You might purchase GAP “insurance” through your auto insurance company for a monthly fee. Both essentially do the same thing, here’s how it works:
Imagine your car is totalled and it’s worth $15,000 at the time of the accident (you’re fine), but you owe $17,000. Your auto insurance company pays that $15,000, but you still owe $2,000. Auto GAP pays off that remaining $2,000. Without it, you would still have to pay off that amount yourself, plus the cost of a new car to replace the one that was totalled.
The fine print
There are many companies that can provide auto GAP insurance, each with their own requirements and limitations, but here are some of the most common requirements.
You need to have standard auto insurance. Auto GAP pays what your auto insurance doesn’t, up to a limit, but it’s not a replacement for your primary car insurance coverage.
Collision auto insurance is when your car insurance company will cover the cost of damages to your car due to some type of collision. Most lenders require that while you have an auto loan, you have “full coverage” auto insurance, which includes collision.
There is a payoff limit. Auto GAP companies will pay the “gap” between what standard insurance pays you if your car is totalled and what you owe on your auto loan. Auto GAP sometimes, but not always, covers your insurance deductible. But you still might wind up paying something out of pocket. The limit on the payoff is usually up to 150% of what the car is worth (MSRP or actual cash value) with a $1,000 cap on the deductible.
For example, if you totalled your car that was worth $10,000, and you owed $16,000 on it, your auto insurance company will pay $10,000. Auto GAP would cover $5,000, or 150%, of what you owe and, perhaps, your $1,000 deductible. That leaves you paying the remaining $1,000. In this example, GAP wouldn’t completely pay off your loan, but it would cut what you owe by 86%.
The car has to be totalled. The vehicle must be declared a total loss. If the car is simply damaged, your auto insurance should cover it and GAP won’t kick in.
Auto GAP only applies to the auto loan. While GAP could pay off an auto loan, it would not pay off medical bills, property damage or any other type of costs that can happen in an auto accident. It also doesn’t cover the cost of a rental car while you’re looking for a new car.
Who needs auto GAP insurance?
GAP insurance is not required by law or insurance companies. Some lenders build auto GAP into the loan or lease that you sign. You should only get auto GAP if you owe more on your car loan than what the car is worth. As we mentioned earlier, this might be the case if you do not give a down payment, if you have negative equity from a trade-in, or both. Here are some ways to prevent owing more than your car is worth.
- Don’t overpay for the car. When you’re car shopping, don’t pay more than the car’s value. You can use a free online industry guide like NADAguides or Kelley Blue Book to look up the value of whatever car(s) you’re considering. These industry guides are what lenders themselves use to value vehicles.
- Give a down payment. The older they get, the less cars are worth, generally speaking. If your car loses its value faster than you pay for it, you can end up being “underwater” on the loan and owing more than its value, especially on a new car, which have high depreciation. One of the best ways to prevent this is to give a down payment.
- Don’t overpay for the loan. Dealerships often raise auto loan APRs to make money, but you can skip the middleman and get a car loan directly from the lender. By applying to several lenders you can choose the auto loan with the lowest APR. To compare, you could fill out an online form at LendingTree and get up to five potential auto loan offers from lenders based on your creditworthiness. Other potential lenders include your bank, credit union and online lender.
You do not need auto GAP insurance if:
- You own your car. The purpose of GAP is to make sure you won’t have to continue to pay off a car loan when you no longer have the car. If you don’t have a car loan in the first place, you don’t need GAP.
- Your car is worth more than what you owe on it. Standard auto insurance will pay whatever the car was worth at the exact time that it was in a crash. If your car was worth $10,000 and you owe less, you’d already be covered; you would owe nothing and have some money in your pocket. Again, you can use an industry guide like NADAguides or KBB to look up the value of your car. To know how much you owe, you can call your lender.
How can you get the best deal on auto GAP insurance?
The best way to get the best deal on auto GAP insurance is to shop around for it. You don’t have to buy it at the dealership. If a dealership tries to sell auto GAP to you for $600 and you tell them you know you can get it for $300 elsewhere, the salesperson may drop the price to match.
Who sells auto GAP?
- Lenders. Check with your lender to see if you could get GAP through them. For example, Navy Federal offers auto GAP for $299 to its auto loan customers. But only to its own loan customers — you could not, for example, have a loan through another lender and buy auto GAP from Navy Federal.
- Auto insurance companies. You could ask your current auto insurance company about its GAP coverage. Some may sell it for as low as $10 per month. And companies like Progressive could offer it to their current insured customers. Other insurance companies though, like State Farm, may only offer it on vehicles they finance.
- Dealers. Auto dealers often act as a middleman and sell auto GAP to car buyers.
- Third parties. There are some companies independent of lenders, auto insurers and auto dealers that sell auto GAP.
When could you get auto GAP?
Many people buy auto GAP as soon as they sign for their auto loan. Some lenders will only sell auto GAP to customers as a part of their car loan deal. Other auto GAP providers will sell it to you at any time. With such a wide variety in prices, it’s a good idea to compare costs.
Auto GAP insurance should only last as long as the auto loan. The point of auto GAP insurance is to protect you from needing to pay off your car loan when you don’t have your car. Once you’ve finished paying of the loan, you don’t need it any more.
Alternatives to auto GAP insurance
There are two alternatives to GAP. The first is to just pay any potential loss out of pocket. The second is an insurance add-on policy called “new car replacement.” With this policy, if your car was totalled, the insurance company would give you an amount of money equal to the cost of a brand new version of your car’s make and model, rather than what your car is worth at that time.
The bottom line on auto GAP insurance
Auto GAP can be extremely useful to people who are underwater on their car loans. It can prevent you from needing to make two car payments at the same time — paying off the loan on the totalled car you can’t even drive any more and a loan on a new car you need to go to work. However, it has its limits and if you’re not underwater on a car loan, it wouldn’t be useful to you.
The information in this article is accurate as of the date of publishing.