What is GAP insurance?
GAP stands for Guaranteed Asset Protection. It’s insurance that covers the difference between the value of your car and the amount you owe on the loan.
Say your car is a few years old and worth about $10,000, but you currently owe $12,000 on your auto loan. If you get into an accident and the car is totaled, your insurance may only pay $10,000 of your remaining loan, leaving you with a $2,000 loan to pay off on a car you can’t even drive!
That’s where GAP insurance comes in. If you have a GAP policy, it will cover the remaining $2,000, and you can start shopping for your next car without worrying about it.
$12,000 Remaining Loan Payments
-$10,000 Car Insurance Payout
-$2,000 GAP Insurance
$0 Remaining Loan Payments
Do I Need GAP?
The short answer is that if you expect to ever owe more money on your car than it is worth, GAP insurance could help you.
Most cars lose about 20% of their original value in their first year of use and 15% every year after that. After 10 years, most vehicles are worth about 10% of their original price. Some vehicles, like trucks or jeeps tend to hold more of their value for longer.
If you take that value and compare it to how much of your loan will be left to pay at 1 year, 2 years, 3 years, and so on, you’ll find out whether you will ever owe more money on your vehicle than it’s worth. If you will, GAP could protect your from being stuck with the bill.
Skip the Math with GAP Analysis
If calculating the future value of your car and your loan payments alongside one another sounds like too much math for you, you can always go to your local credit union or bank and talk about getting pre-approved for an auto loan and ask for a GAP analysis. They can take your vehicle and loan information and run an analysis to show you when, if ever, you could benefit from GAP insurance for your vehicle.
Unless you’re leasing your car, choosing whether you want GAP insurance is up to you. Like most any insurance, GAP is a way to give yourself peace of mind in the event of an accident. If you ever find yourself with a totaled car and an unpaid loan hanging over your head, you may be glad you chose GAP.