GAP stands for Guaranteed Asset Protection, Gap insurance for drivers refers to a type of insurance that covers the difference, or the gap, between the amount of money you owe (that is, the outstanding balance on your payment) on your car loan or lease and the actual cash value (ACV) of your vehicle if it is stolen or badly damaged in an accident. Gap insurance is important because most cars depreciate quickly, and if you get into an accident and your car is deemed a total loss, the insurance payout may not be enough to cover the outstanding balance on your loan or lease.
For instance, if you purchase a car for $40,000 and take out a loan for $35,000, and the car is totaled in an accident and the insurance company determines that the actual cash value of the car is only $30,000, then you will owe the remaining $5,000 to the lender. However, if you have gap insurance, it will cover that remaining $5,000.
Gap insurance is usually offered to the driver by car dealerships or lenders when you purchase or lease a new car, but it can also be gotten independently through any other insurance company that offers the service. Gap insurance is most often a one-time payment and is relatively inexpensive compared to regular auto insurance.
Gap insurance is not an insurance policy required by law; it is however encouraged for drivers or car owners to purchase Gap insurance to avoid being stuck with a loan or lease payment on a vehicle that is no longer drivable due to theft or an accident. It is important to carefully review the terms and coverage of any gap insurance policy before making a decision to purchase it.
Types of gap insurance
New car gap insurance
This is a type of gap insurance particularly designed for brand new cars. It covers the difference between the amount you owe on your new car loan or lease and the ACV of the vehicle if it’s totaled or stolen. New car gap insurance can be purchased from your car dealership, your insurance company, or through a third-party provider. It is usually a one-time payment that can be rolled into your car loan payments. However new car gap insurance is not required by law, it is an optional coverage and it is up to you as a new car owner to decide if the coverage is worth the additional cost.
Used car gap insurance
This is also similar to new car gap insurance; however, Gap insurance coverage is particularly important for used cars, as their value tends to depreciate more quickly than new cars, meaning that the amount owed on the loan may be greater than the car’s ACV. The used car gap insurance will cover the difference between the outstanding loan or lease balance and the ACV of the vehicle and thereby protect the car owner from financial loss.
The cost of gap insurance for the used car will vary depending on factors such as the value of the car, the amount of the loan or lease, and the length of the loan or lease term
Loan/lease payoff gap insurance
When you purchase a car, its value begins to depreciate as soon as you drive it off the lot. This implies that in the event of an accident or your car is stolen, your insurance company will only pay the current market value of your car, which may be less than what you owe on your car loan or lease. The difference between what you owe and the current market value of your car is known as the “gap”. This type of gap insurance will then cover the difference between the outstanding loan or lease balance and the ACV of the vehicle, irrespective of whether it’s a new or used car or a leased vehicle. Lease gap insurance however applies specifically to leased vehicles. It covers the difference between the outstanding lease balance and the ACV of the vehicle if it’s totaled or stolen.
Note that not all gap insurance covers used cars, as the value of used cars tends to depreciate more slowly. However, if you are purchasing a used car and are concerned about obtaining insurance to cover the potential for a gap between your loan or lease balance and the car’s value, you may want to consider looking into other types of insurance coverage that can help protect you in the event of an accident or theft.
Depreciation gap insurance
It is also known as new car replacement insurance. It is a type of gap insurance that covers the difference between the original purchase price of a new car and its actual cash value at the time of an accident or theft, that is, the depreciation of the vehicle over time. It covers the difference between the amount owed on the loan or lease and the actual value of the vehicle at the time of the accident or theft.
Depreciation gap insurance is often available as an add-on to your car insurance policy, either through your car dealership or through your auto insurance provider. It is typically recommended for people who have recently purchased a new car, as new cars can depreciate rapidly in their first few years of ownership
Total loss only gap insurance
It is also known as TLG insurance, a type of insurance coverage that is designed to protect drivers from financial loss in the event that their vehicle is totaled (that is, completely damaged) in an accident. Unlike traditional gap insurance, which covers both total loss and partial loss, TLG insurance only covers total loss. This means that if your vehicle is damaged in an accident but not deemed a total loss, you will not be covered by this type of insurance.
TLG insurance is a very good option for drivers whose loan-to-value ratio (LTV) is low, meaning they owe less on their vehicle than it is worth. This is because traditional gap insurance may not be necessary in this situation, as the amount owed on the vehicle may already be less than its ACV.