According to CNW Marketing Research, 70.5 percent of people finance their cars. Those with higher interest rates, longer loan terms (60 months or more), and little to no down payment may find themselves in a situation where they are underwater with their vehicle. In other words, more is owed on the vehicle than it is worth. According to Edmunds.com, 40 percent of Americans with auto loans find themselves in this situation.
Imagine the following scenario:
- You owe the bank $15,000 on that loaded SUV you bought a few years ago
- You are in a car accident that wasn’t your fault
- Your car is totaled. Your insurance company sends an adjuster and determines your car’s value before the accident to be $9,000
- A settlement check is paid to the bank for $9,000.
This is where the story gets interesting….
The bank is short $6,000. It’s not their fault your car was totaled, they are money they loaned you. So who pays the bank?
Without GAP insurance….YOU DO.
I don’t know about you, but I would not be happy about paying on a vehicle that I am no longer driving. Also, more than likely you’ll have vehicle replacement expenses. If you have GAP insurance, they will pay the difference between the appraisal value of your vehicle and the amount owed to the bank. This is the situation I was in. The numbers are made up, but the story is true. GAP insurance is covering the difference on my totaled vehicle so I don’t have to.
What is GAP?
Guaranteed asset protection insurance (or GAP Insurance) is an insurance coverage offered as a supplement to automobile insurance policies. It provides financial protection from certain types of loss that are not covered by standard automobile insurance. GAP is designed to cover the unpaid balance of an automobile loan in the event of a total loss of the vehicle. GAP covers the difference between the depreciated actual cash value of a lost vehicle and the outstanding loan balance on the vehicle. The coverage may also include payment of the physical damage deductible. (Source: Wikipedia)
Who needs GAP Insurance?
- Buyers financing a new vehicle with little to no money down
- Buyers with long term loans
- Anyone who leases an automobile. With leased vehicles, there is always a gap between what the bank is owed and the vehicles actual value
Who may not need GAP insurance?
- Those financing a used vehicle as the vehicle’s depreciation rate has slowed down
- Those with a large down payment or shorter term loans
Who DOES NOT need GAP insurance?
- Buyers paying cash. GAP is only to cover the difference between the fair market value and the amount owed to the bank.
- Buyers covered by their auto insurance. This is rare, but some insurance companies offer this protection. Double-check so you don’t pay for duplicate protection.
What about you? Do you have any experience with GAP insurance? Tell us about it in the comments