Many insurance and financial companies offer Guaranteed Asset Protection (or GAP) insurance when you purchase a new or used car.
What is GAP insurance?
When you are approved for a vehicle loan, the loan balance is often higher than the actual value of the vehicle. If you have an accident, your insurance company may only pay for the market value of the vehicle, instead of the total amount you owe on your loan. GAP insurance covers the difference between the loan balance and actual value of the vehicle.
If you don’t have GAP insurance and have a total loss accident, you can find yourself in a tough spot. You may still need to make the normal monthly payments on your (now totaled) car, in addition to the stress of needing to obtain financing for a new car to get to work.
Is it really necessary?
Not always. Here are two examples:
- If you are making a large down payment on your car at the time of purchase and the value of your car is higher than the small loan you took at on your car, GAP insurance is not necessary.
- In most car lease situations, since the vehicle is not actually owned by the consumer, GAP insurance is covered by the leasing agent.
Who offers GAP insurance?
In addition to car dealerships, most banks and credit unions offer it with car loans. Also, your personal auto insurance carrier may offer GAP insurance in addition to the normal car insurance policy. You must ask for this coverage. Many people assume they have it and don’t realize it until it is too late.