By Charlestien Harris, Retired Financial Counselor at Southern Bancorp
You may be asking yourself: What exactly does GAP insurance cover, and do I really need it?
That is a question I get from time to time, so I thought I would share some factual information and let you make your own decision.
GAP insurance covers the remaining balance on your auto loan or lease if your vehicle is totaled or stolen and you owe more than its actual cash value after depreciation. GAP stands for Guaranteed Asset Protection insurance.
Below are a few important facts to know before deciding whether to purchase GAP insurance.
1. Know How GAP Insurance Works
GAP insurance steps in after a total loss when your standard comprehensive or collision coverage pays out. Here is an example of the difference:
Standard insurance pays: Your car’s current market value, minus your deductible. GAP insurance pays: The remaining difference between your vehicle’s market value and your loan balance.
As a result, your auto loan may be paid off completely instead of leaving you responsible for a remaining balance.
2. Know When You Need GAP Coverage
Vehicles lose value quickly, which can create negative equity, meaning you owe more than the vehicle is worth. Consider the following factors when determining whether GAP insurance makes sense for you:
A small down payment: Putting down 20% or less can increase the likelihood of owing more than the vehicle is worth. Long financing terms: Loans lasting 60 months or longer may increase the need for GAP coverage. Leasing a vehicle: GAP coverage is often required by leasing companies, so you may have little or no control over this decision. The type of vehicle: Vehicles that depreciate quickly, such as luxury vehicles or certain makes and models, may increase your risk of negative equity.
3. Know What GAP Insurance Excludes
GAP insurance does not cover everything. Here are some common exclusions:
Deductible costs: Your collision or comprehensive insurance deductible is generally not covered and remains your responsibility. It is important to keep your standard auto insurance policy active and up to date so there is no lapse in coverage. Late fees: Overdue loan or lease payments are the responsibility of the borrower or lessee and are not covered. Vehicle repairs: Mechanical issues, maintenance costs, or engine failures are not covered. Personal expenses: Medical bills, bodily injuries, and other personal costs are not covered. Review your standard insurance policy to ensure you have adequate coverage for these situations.
4. Know Where to Purchase GAP Insurance
You can typically purchase GAP insurance from the following sources:
Your auto insurance company: Many insurers offer GAP coverage as an inexpensive add-on to your existing policy, often costing between $20 and $40 per year. A dealership or lender: GAP insurance is often sold as a flat-fee product or debt waiver, and the cost can be added to your monthly payment. Be sure you understand the total cost and whether the coverage is necessary for your situation. Ask how much the additional coverage will affect your financing terms and monthly payment.
Why GAP Insurance Matters
Imagine this: You just drove your dream car off the lot. The moment those tires leave the dealership, your vehicle begins to lose value.
Now imagine that just three weeks later, you are involved in a serious accident, and your car is declared a total loss. Your insurance company issues a check based on the vehicle’s actual cash value, which may be less than what you still owe on the loan. You could find yourself with negative equity, also known as being “upside down” on your loan, and an unexpected bill.
This is where Guaranteed Asset Protection (GAP) insurance comes in. It is designed to serve as a financial safety net by helping cover the difference between what your standard auto insurance policy pays and what you still owe on your loan or lease.
Before purchasing GAP insurance, take the time to do your research and make sure you understand how it works, what it covers, what it excludes, and whether it is the right choice for your financial situation.
For more information on this or other financial topics, you can email Charlestien Harris at charlestienharris77@gmail.com or write to P.O. Box 1825, Clarksdale, MS 38614. Until next week – stay financially fit!
