How to Add GAP Insurance After Buying a Car
Considering GAP insurance for your car after purchase? Learn how this coverage protects against depreciation and outstanding loan balances.
Guaranteed Asset Protection (GAP) insurance protects vehicle owners from significant financial loss if their car is declared a total loss due to theft or damage. It addresses the risk where the amount owed on a car loan exceeds the vehicle’s actual market value.
Understanding GAP Insurance
Guaranteed Asset Protection (GAP) insurance is an optional coverage designed to pay the difference, or “gap,” between the outstanding balance on a car loan or lease and the vehicle’s actual cash value (ACV) at the time of a total loss.
When a car is stolen or damaged beyond repair, standard auto insurance policies pay out the actual cash value (ACV), which accounts for depreciation. Vehicles often lose 20% or more of their value within the first year. This rapid depreciation can create negative equity, where the loan balance exceeds the car’s market value.
For example, if a vehicle is purchased for $30,000 and a year later is valued at $22,000 due to depreciation, but the owner still owes $28,000 on the loan, a standard insurance payout of $22,000 would leave a $6,000 shortfall. GAP insurance bridges this financial gap, covering the $6,000 difference, thereby preventing the owner from owing money on a vehicle they no longer possess. It generally covers the difference between the loan balance and the insurance payout, but typically excludes items like car repairs, medical bills, missed payments, or an insurance deductible.
Factors for Deciding on GAP Insurance
Several financial circumstances make GAP insurance a relevant consideration. A small or no down payment can immediately lead to negative equity, as the financed amount may exceed the car’s depreciated value. If less than 20% was put down, initial depreciation can quickly put the loan underwater.
Long loan terms, such as 60 months or more, also contribute to negative equity because the principal balance reduces slowly. This slower reduction means the vehicle’s depreciation often outpaces the loan’s payoff rate. Vehicles known for rapid depreciation, including certain luxury models, are more susceptible to having their market value fall below the loan balance.
For leased vehicles, GAP coverage is frequently included or strongly recommended. Lease payments are structured based on projected depreciation, and if the lease terminates early due to a total loss, the amount owed can exceed the car’s actual cash value. Financing additional costs, such as taxes, registration fees, or extended warranties, by rolling them into the primary car loan can inflate the initial loan amount beyond the vehicle’s actual selling price. This practice increases the likelihood of starting the loan with negative equity.
Where to Obtain GAP Insurance
Consumers have several avenues for acquiring GAP insurance. Dealerships frequently offer GAP coverage at the point of sale, integrating the cost directly into vehicle financing. This provides convenience but can result in higher overall costs, as the premium might be subject to interest over the loan term.
Many existing auto insurance companies also provide GAP coverage as an optional add-on. To qualify, an individual needs to maintain comprehensive and collision coverage. Purchasing GAP insurance from an existing insurer can be more cost-effective than through a dealership, as it avoids additional interest charges.
Third-party specialty insurers or financial institutions, such as credit unions, also offer GAP insurance. These providers can offer competitive rates and terms, allowing consumers to compare options beyond the dealership and their current auto insurer. Research and compare policies from various sources to find the most suitable coverage.
Steps to Add GAP Insurance
Adding GAP insurance after purchasing a vehicle involves several practical steps. Begin by gathering all necessary vehicle and financing information. This includes the vehicle’s make, model, Vehicle Identification Number (VIN), current outstanding loan amount, and remaining loan term. Details from the existing auto insurance policy, such as the declarations page, are also important.
Contact potential GAP insurance providers, including your current auto insurer, the financial institution holding your car loan, or independent specialty insurance companies. Inquire about their GAP coverage options, eligibility criteria, and the process for obtaining a quote. Obtaining quotes from multiple sources allows for a comparison of coverage details and pricing.
After receiving quotes, review the policy terms and exclusions from each provider. Understand what financial shortfalls are covered, any limitations on the payout amount, and the conditions under which a claim would be processed. This review helps ensure the policy meets your needs.
Once a suitable policy is identified, finalize the purchase by completing the application and arranging payment. Retain all policy documents, including the contract and payment confirmations, for your records. This documentation is crucial for reference and if a claim needs to be filed.