What Is GAP Insurance in North Carolina?

Guaranteed Asset Protection, or GAP insurance, is a type of auto insurance designed to address a common financial risk associated with vehicle ownership. It helps protect consumers when the amount owed on a car loan or lease exceeds the vehicle’s actual market value. This financial discrepancy can arise quickly due to the rapid depreciation of new vehicles from the moment they are driven off the dealership lot.

Defining GAP Insurance

GAP insurance covers the difference between a vehicle’s actual cash value (ACV) at the time of a total loss and the outstanding balance of the auto loan or lease. When a vehicle is declared a total loss due to an accident or unrecovered theft, standard auto insurance policies typically only pay out the vehicle’s ACV. Because vehicles depreciate significantly, often losing around 10 percent of their value immediately and potentially up to 45 percent within the first year, the insurance payout may be less than the loan balance. For example, if a vehicle’s ACV is $20,000 but the loan balance is $25,000, GAP insurance covers the $5,000 difference.

Situations Where GAP Insurance is Important

Acquiring a new vehicle often leads to immediate depreciation, creating an initial gap between its value and the loan amount. Consumers making a small down payment, typically less than 20 percent of the vehicle’s price, may find themselves owing more than the car is worth for an extended period.

Financing a vehicle with a long loan term, such as 60 months or more, also prolongs the period during which the loan balance might exceed the vehicle’s depreciated value. Rolling negative equity from a previous car loan into a new one can immediately place a borrower in an upside-down financial position. Leasing a vehicle is another situation where GAP coverage is beneficial, as lease agreements often require it and the lessee is responsible for any deficiency if the vehicle is totaled.

North Carolina Considerations for GAP Insurance

In North Carolina, Guaranteed Asset Protection waivers are regulated under Chapter 66 of the General Statutes. State law does not mandate the purchase of GAP insurance, but a lender may require it as a condition of a loan agreement. These waivers are exempt from the state’s general insurance laws under Chapter 58.

The cost of a GAP waiver must be stated separately and cannot be considered a finance charge or interest on the vehicle loan. It can be financed as an authorized charge under the Retail Installment Sales Act, Chapter 25A. GAP waivers may also include benefits such as a credit towards a replacement vehicle or coverage for excessive wear and tear or mileage on leased vehicles. The extension of credit or the terms of the loan cannot be conditioned solely upon the purchase of a GAP waiver.

Consumers in North Carolina have protections regarding GAP waivers. A “free-look period” allows the waiver to be canceled for a full refund if no benefits have been provided. If the loan is paid off early or the vehicle is sold, consumers are entitled to a refund for the unearned portion of the waiver’s purchase price, provided no claim has been filed against it. Cancellation requests are expected within 90 days of the event that terminates the vehicle finance agreement.

How to Acquire GAP Coverage

Consumers have several avenues for obtaining GAP coverage. Dealerships offer GAP waivers as part of the financing package, which can be convenient but may result in the cost being rolled into the loan, potentially increasing the total expense due to interest.

Many auto insurance companies provide GAP insurance as an add-on to existing comprehensive and collision policies. This option is often more cost-effective, with annual costs typically ranging from $40 to $60. Banks and credit unions that provide vehicle financing may also offer GAP coverage as part of their loan packages. Compare the coverage limits, exclusions, and overall cost from different providers to select the option that best fits individual financial circumstances.