Mind the GAP (insurance)

If you’ve ever leased or financed a car, you may have been offered GAP insurance. And, if you’re like me, you may have turned it down—because it’s usually presented along with all the other upsells, like VIN etching, undercoating, and interior protection. But GAP coverage is actually one of the upsells that makes a lot of sense. Here’s an overview, to help you make an informed decision about it, the next time you’re buying a car.

What is GAP insurance?

Despite what it might sound like, this GAP has nothing to do with a clothing retailer, the British underground, or orthodontia. It stands for ‘guaranteed asset protection.’ The asset, of course, is the car. And the protection it provides is giving you full coverage of the amount you owe your auto loan or leasing company, in case the car is stolen or totaled.

How does GAP insurance work, and why would you need it?

You might be thinking, ‘I have car insurance that covers theft or total loss, why would I need GAP insurance?’ And that’s a great question. But here’s the thing: an insurance payout doesn’t necessarily pay you what you actually owe on the car. (This is even more likely to be the case with a lease, where the payoff amount at any given time is almost always a lot more than market value.)

For example, you might owe your $15,000 on your car loan. If your car is stolen, your insurance policy will usually pay actual cash value (or ACV, in insurance-speak). That’s the current market value of your car, which means their calculation of its fair market value. So the insurance company might decide that your car was only worth $11,500 at the point that it was totaled or stolen, and that means you owe the lender $3,500. On a car that you no longer have. (That’s just adding insult to injury, when you’re mourning the loss of your car to begin with!)

If your car is stolen or totaled, GAP coverage keeps you
from owing more than your insurance payout.

This is where GAP saves the day. Because in addition to being a legitimate acronym—guaranteed asset protection— it also covers the gap between what your insurance company pays out, and what you owe your lender. (See what they did there?) 

If you finance a car that depreciates quickly, GAP insurance is an especially good idea.

So if you have GAP insurance coverage, you can just pay off your loan or lease in full, not owing anything, and start shopping for your next car. 

How much does GAP insurance cost?

The good news is, it’s not very expensive. It varies based on the value of your car, but In most cases, you’ll pay less than $5 a month, or $20-60 a year.

What are the downsides?

GAP insurance is an additional cost, even if it’s typically not a very big one.

And most GAP insurance companies will require you to carry both collision and comprehensive insurance on your car—a little more than most states require you to have. That’s not a bad thing, necessarily, because it means you have better coverage for minor to moderate damage or costly parts that could be stolen or vandalized. But it does mean you’ll pay a little more in regular car insurance premiums.

Other than that, there aren’t a lot of significant reasons not to get GAP.

Overall, is GAP insurance worth it?

There are a lot of sound reasons to get GAP insurance coverage. It’s especially useful if:

  • You made a small down payment and owe a lot on the car
  • Put a lot of miles on your car (which decreases its value more quickly)
  • Your car is leased
  • You’re financing a make/model of car that depreciates quickly
  • You have a loan longer than 48 months

Considering its low cost, and how much money GAP insurance can save you if your car is stolen or totaled, we recommend it. It’s a small price to pay for peace of mind.

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