"GAP" in GAP insurance stands for Guaranteed Auto Protection. This is usually taken by people who have car loan balances that are more than what their car is currently worth. Cars are one of the things that depreciate easily. A brand new car that costs $30,000 can be as low as $20,000 at face value in a matter of months. Gap insurance is used when the car is stolen or it is totally damaged.
So how does it work?
If your car was stolen or you were involved in an accident where your car was totaled and you are still paying on your car loan, the difference on your loan balance will be covered by gap insurance. Let us say that you initially bought your car for $50,000, and because you have used your car it depreciates and at the time that the car was stolen or totaled, its value decreased to $45,000. But you are still paying on your car loan and have a balance of approximately $48,000. Your car insurance will cover the value of your car now which is a depreciated $45,000 and you will still owe your car loan lender a balance of $3,000. This is where gap insurance comes in. It will cover the $3,000 balance that you owe. Instead of you paying for the balance to your lender, you can have gap insurance pay it for you so you won’t have to shed money from your savings account.
Gap insurance is not automatic. Although some car loan lenders will recommend that you get auto insurance, some will not give the option. You have to request for it. Usually, gap insurances have a high premium but you can never tell when accidents will occur so it would still help you in your expenses. You have to remember some things though.
There is a limit on what amount gap insurance can cover and that is $50,000. Your car loan balance should not exceed $100,000. Some gap insurances may not cover the whole balance when it reaches a particular amount. You should inquire about this because this varies if you have purchased a used car or a new one. This also does not cover your missed payments and other fines to your lender because that is your responsibility and is not included in the policy when your vehicle is stolen or when it is totaled. There is also a requirement on the term of your car loan. Your term should not exceed 8 years. So, when getting gap insurance, make sure that you understand the terms and conditions for you to be well informed and know what are its coverage.