Does GAP Insurance Cover Repossession?
Understand GAP insurance coverage and its role when facing vehicle repossession. Get clarity on your financial obligations.
Purchasing a vehicle often involves securing a loan, and many buyers opt for Guaranteed Asset Protection (GAP) insurance. This type of insurance is frequently misunderstood, especially regarding its role in vehicle repossession. This article clarifies the purpose of GAP insurance and its interaction with vehicle repossession.
Understanding GAP Insurance
Guaranteed Asset Protection (GAP) insurance is designed to cover the financial “gap” between a vehicle loan’s outstanding balance and the vehicle’s actual cash value (ACV) at the time of a total loss. Vehicles typically depreciate rapidly, often losing significant value immediately after purchase. This means if a vehicle is totaled in an accident or stolen, a standard auto insurance policy, based on ACV, might pay less than the amount still owed on the loan.
GAP insurance activates in these total loss scenarios. For instance, if a car is purchased for $40,000 and later totaled when the loan balance is $35,000 but the ACV is $30,000, the standard insurance payout would leave a $5,000 deficit. GAP insurance covers this remaining $5,000, preventing the borrower from being responsible for a loan on a vehicle they no longer possess. This coverage is an optional add-on, often purchased with the vehicle or through an auto insurance provider.
Repossession and Remaining Loan Obligations
Vehicle repossession occurs when a lender reclaims a vehicle because a borrower failed to meet loan terms, most commonly due to missed payments. As the vehicle serves as collateral for a secured auto loan, the lender has the right to seize it upon default. Lenders often initiate repossession after a borrower is 90 days or more delinquent.
After repossession, the lender typically sells the vehicle, often at a public auction, to recover the outstanding loan amount. However, the auction sale price is frequently less than the remaining loan balance due to depreciation and auction dynamics. If sale proceeds do not cover the full loan amount plus repossession costs like towing, storage, and auction fees, the borrower remains responsible for the difference. This remaining debt is known as a “deficiency balance.” For example, if $15,000 is owed on a loan, but the repossessed vehicle sells for $6,000, a $9,000 deficiency balance, plus additional fees, would remain.
How GAP Insurance Interacts with Repossession
A common misconception is that GAP insurance covers the deficiency balance after a vehicle repossession. However, standard GAP policies do not cover financial obligations resulting from a repossession. GAP insurance is designed to address the financial shortfall when a vehicle is declared a total loss due to events like accidents, theft, or natural disasters.
Repossession, by contrast, is a consequence of loan default and is considered a credit event, not an insurable peril. The purpose of GAP insurance is to protect against depreciation and the difference between an insurance payout and a loan balance after a total loss. It does not cover debts incurred from missed payments or a lender’s action to reclaim collateral. Therefore, if a vehicle is repossessed due to a borrower’s failure to make payments, the deficiency balance after the vehicle is sold will not be covered by a GAP insurance policy.
Addressing a Deficiency Balance After Repossession
When a repossessed vehicle is sold and a deficiency balance remains, the borrower is responsible for paying this outstanding debt. Lenders will pursue collection, which can involve contacting the borrower directly to arrange payment, sending the debt to a collection agency, or initiating legal action to obtain a judgment against the borrower. A judgment could lead to wage garnishment, bank account levies, or liens on other property, depending on state laws.
Borrowers facing a deficiency balance have several avenues to explore. One approach is to negotiate directly with the lender to establish a manageable payment plan or to settle the debt for a reduced lump sum, especially if proof of financial hardship can be provided. Another option is to seek guidance from a non-profit credit counselor who can provide personalized debt and budget advice. If the deficiency balance is substantial and other debts are overwhelming, filing for bankruptcy, such as Chapter 7, can potentially discharge the deficiency balance along with other unsecured debts, offering relief from collection efforts. It is important to address a deficiency balance promptly to mitigate its impact on one’s credit report, where a repossession can remain for up to seven years.