What is the difference between GAP Coverage and Total Loss Coverage?


GAP or Loan / Lease Pay-off Coverage, as the term implies, does have something to do with car loans and leases. It offers protection to drivers or vehicle owners whose loaned or leased cars obtain costs of damages that exceed the actual monetary value of the vehicle. In other words, if the leased car is damaged beyond possible repair, the owner would have to pay all the worth of the damages to the leasing company, even if it far exceeds the actual value of the vehicle. Having Loan / Lease Pay-off coverage allows the owner to potentially deduct a significant amount from what he / she would potentially have to pay by identifying the “gap” between the actual worth of the vehicle and the amount of money owed to the bank or company.

To take things further, say or example, you were involved in an accident with the cost of damages, upon assessment, amounted to $15,000. The actual value of the vehicle, however, is only $10,000. The “gap” therefore is $5,000. GAP coverage deducts this “gap” from the total amount of damages to be paid for.

Total Loss Coverage is similar to GAP coverage. The difference lies in how the policy pays for the damages inflicted on the vehicle. Ordinary GAP coverage pays the owner or consumer the negative equity or “gap” on a vehicle that can no longer be repaired. Total Loss Coverage, on the other hand, provides the consumer with a certain amount for the purchase, or leasing of another new vehicle. The maximum amount is usually $5,000.

Following the example given in the GAP coverage, instead of deducting the negative equity (in this case $5,000), Total Loss Coverage requires the vehicle owner to personally pay for this “gap”, but will, in turn, be given a corresponding amount which could enable the owner to purchase or lease another vehicle.

In choosing whether to patronize GAP coverage of Total Loss Coverage, one simply needs to consider his or her ability to pay the negative equity or not. If you cannot afford to pay for this, GAP coverage would be appropriate for you. The same philosophy applies – if you can afford to pay it and prefer the prospect of getting cash for the purchase of a new vehicle, then you can opt for Total Loss Coverage.

One last reminder – some states require leasing and loaning companies to include Loan / Lease Pay-off coverage in the contract. One must be aware of this, so that they will not be victimized by companies which offer this coverage at an additional price.