What Are the Cons of Gap Insurance?
Explore the situations where GAP insurance may not provide value. Understand its limitations before making a purchasing decision.
Guaranteed Asset Protection, or GAP, insurance serves a specific purpose in vehicle financing. This coverage is designed to bridge the financial “gap” that can arise between a vehicle’s actual cash value and the outstanding balance of a loan or lease, particularly if the vehicle is declared a total loss due to an accident or theft. While it offers a financial safety net, certain scenarios and policy characteristics can diminish its value, making it an unnecessary expense for some vehicle owners.
When the Financial Gap is Minimal
For many vehicle owners, the necessity of GAP insurance is reduced or eliminated by their financial circumstances. A substantial down payment, for instance, significantly lowers the initial loan-to-value ratio. If a buyer puts down 20% or more of the vehicle’s purchase price, the amount financed is immediately closer to or even below the vehicle’s market value. New cars depreciate rapidly, so a larger upfront investment helps offset this initial depreciation.
Similarly, a shorter loan term can quickly close the potential gap. Opting for a shorter term, such as 36 or 48 months, accelerates the repayment of the principal, building equity at a faster rate than the vehicle’s depreciation. This rapid equity accumulation means that the outstanding loan balance is less likely to exceed the vehicle’s actual cash value.
Certain vehicles also retain their value more effectively than others, which can mitigate the need for GAP coverage. Vehicles with strong resale markets or those known for their durability and reliability tend to depreciate at a slower rate. For these models, the actual cash value may align more closely with the loan balance over time.
As a vehicle owner consistently makes loan payments, the principal balance steadily decreases. If a significant portion of the loan has been repaid, the remaining balance might be less than or equal to the vehicle’s current market value. In such cases, the financial gap no longer exists.
Cost of Coverage
The financial outlay for GAP insurance represents another potential drawback. The cost of GAP insurance can vary considerably depending on where it is purchased. When added as an endorsement to an existing auto insurance policy, it typically costs between $20 and $100 per year. However, if acquired through a dealership or lender, the cost is often significantly higher, ranging from $400 to $700 as a flat rate.
This higher cost from dealerships is frequently rolled into the vehicle loan, meaning the consumer pays interest on the GAP insurance premium over the entire loan term. Financing the premium increases the total amount paid for the coverage, making it more expensive than its upfront price.
For consumers whose financial situations already minimize the potential gap, such as those who made a large down payment or chose a short loan term, the cost of GAP insurance may outweigh any benefit. The funds spent on the premium could instead be allocated to a larger down payment, reducing the loan amount and accelerating equity buildup.
Scope of Coverage Limitations
GAP insurance has precise limitations. It is strictly limited to addressing the difference between a vehicle’s actual cash value and the outstanding loan balance in a total loss. It does not extend to other common expenses. For example, GAP insurance does not cover the primary insurance deductible.
GAP insurance offers no protection for rental car fees, medical bills, or repairs for vehicles damaged but not declared a total loss. If a vehicle is repairable, GAP insurance will not contribute funds. It is also not a substitute for a vehicle warranty; mechanical failures or routine maintenance are excluded.
Specific exclusions within GAP policies can limit payouts. Coverage may be denied if the vehicle was used for commercial purposes or if the loss resulted from illegal activities. GAP insurance does not cover negative equity carried over from a previous loan, late payments, or overdue amounts. Modifications not covered by the primary insurer can also reduce or void the payout.