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Gap insurance and the way it works


GAP insurance as the term suggests provides for the GAP between what you have and what you need. In simpler terms, GAP insurance comes into the picture when you have taken an auto loan to purchase a car. In the first few years, your car is still brand new and a major chunk of the loan still remains unpaid. However, in such a scenario, if your car is totalled or lost, its net worth comes down drastically. So whatever is the difference between what the totalled car can fetch and what you need to repay the loan is provided for by the GAP insurance. Hence the insurance is significant while you still have an unpaid loan and are concerned about the situation where you will end up without the car, but with the debt.

Working of a GAP insurance

GAP means Guaranteed Auto Protection and works to help owners get coverage against the depreciation of the car, which happens at a very alarming rate, as opposed to the actual debt. When you buy a new car with an auto loan, you might need GAP insurance along with comprehensive and collision coverage. If your car, costing $20,000 is totalled in the first year and you are still left with a loan of $18000, GAP insurance can bail you out. This is because comprehensive and collision coverage will provide you only the market value of the car, which due to the depreciation could be as low as $16,000 after the first year. In such a scenario, GAP insurance will provide you the remaining $2000 to pay off the loan.

When to buy and when not to buy

It is always good to have adequate coverage in case of unforeseen events. If you are buying a car, with a heavy loan, or if you lease the car, in which case you are responsible for it in case of an accident, GAP insurance is imperative. This will ensure that you have coverage protection, while you are still upside down, which refers to the situation where you have an unpaid loan. However, if you purchase the car with down payment and do not have any loan to be repaid, GAP insurance is not required and becomes redundant. In that case, comprehensive and collision insurance would suffice. So, GAP insurance is really a life jacket for those who own a car and yet, have a bigger unpaid loan as opposed to the market value of the car.