GAP stands for “Guaranteed Auto Protection. Car gap insurance is one of those expenses that seem like a waste of money until you need it. In fact, unless you have suffered the total loss of a vehicle through either collision or theft, you may be unfamiliar with car gap insurance and how much it could ultimately save you from a financial nightmare.
This type of insurance is something you might want to give careful consideration to. If you have an accident, your insurance will only pay you the current market value of the car, but not the total amount of what you owe the finance company. This leaves a gap in your coverage, so you will still be left with an amount that you still have to pay. Depending on the amount of your down payment (or trade-in equity), you would still be responsible to your lender for the balance of the loan. The moment you drive a new vehicle off the dealer lot, your auto insurance is probably inadequate to protect you financially in the case of a total loss.
Gap auto insurance is not required when you buy a new car, but in the case of an accident, this type of coverage can protect your investment. This type of coverage is a must have for any new car purchase, as the car’s value drops significantly as soon as it is driven off the car lot. Keep in mind that your regular auto insurance is designed to pay the lender the vehicle’s current cash value — not the current loan balance. The difference can be thousands of dollars. And we all know once your new car — owned or leased — leaves the lot, it is considered a used car and the value of it drops significantly. If you have car gap insurance, your insurer pays the difference, not you.
More and more auto insurance companies are starting to offer gap insurance. In fact, many states now require that all companies who sell auto insurance also offer this additional coverage. If your current company does not offer gap auto insurance, you can often purchase it from a company as an independent policy. More than likely your insurance carrier offers auto gap insurance, and many carriers will allow you to add it at any time to cover the original loan. One of the biggest mistakes consumers make in buying car gap insurance is to buy it at the dealership where it costs more. You can purchase it any time and insurance companies are less expensive. You do not have to purchase it from the vehicle manufacturer at the time of sale.