If you’re financing your vehicle, you may want to consider purchasing guaranteed auto protection (GAP) insurance. This type of auto insurance helps you avoid paying for a car you can’t use anymore, which can happen if it’s declared a total loss after an accident. However, getting this protection can cause your car-related expenses to go up. Check out this comprehensive guide to the cost of GAP insurance to determine whether it’s worth your investment.
What Is GAP Insurance?
Before exploring how much GAP insurance is, let’s take a look at what it is and how it can be beneficial to you. GAP insurance is an optional auto insurance coverage that pays the difference between the value of your vehicle and the amount you still owe on your car loan after it’s totaled or stolen. This kind of protection is not automatically included in your regular car insurance policy, even if you have collision and comprehensive insurance.
Collision and comprehensive insurance only cover up to what your vehicle is worth at the time of the accident or theft. If the outstanding amount on your car loan is more than that, GAP insurance takes care of the difference. This means you don’t have to pay anything out of your own pocket other than your car insurance deductible.
Regardless of where you live in the United States, you aren’t legally required to carry GAP insurance. However, some states make it mandatory for auto dealers to offer this type of coverage to their customers.
How Does GAP Insurance Work?
Suppose your vehicle is stolen. The vehicle has a current market value of $25,000, and you have $30,000 left on your auto loan. Since you’ve purchased comprehensive insurance, your insurance company will reimburse you for what your car is worth at the time of the theft, minus your $500 deductible.
After paying that $24,500 to your lender, you would still owe $5,500 on your car loan. You’re required to pay $500 of that amount to cover your deductible. If you have GAP insurance, you’ll be covered for the remaining $5,000. Without this protection, you’ll have to bear both the balance on your loan and the deductible.
Is GAP Insurance Worth It?
In many cases, GAP insurance isn’t necessary. If you don’t have an auto loan or lease a vehicle or you owe less on your loan than the value of your car, you don’t need this coverage. However, if you’re leasing a vehicle or have a newer car loan, you should consider whether you’ll be able to cover the difference between the remaining balance and your car’s value if a total loss or theft occurs. If you can’t afford to pay that amount, buying GAP insurance may be a good idea.
Keep in mind that you won’t need GAP coverage forever. You can drop it once the balance on your auto loan falls below the value of your vehicle.
Who Needs GAP Insurance?
Certain drivers are more likely to benefit from GAP insurance than others. If you belong to one of the following groups of people, you may want to add this optional coverage to your existing car insurance policy:
- Lessees: GAP insurance is often included in an auto lease. This is because a lease tends to have a lower monthly payment than a car loan, which creates a wider gap between the outstanding amount and the actual value of the vehicle.
- Car buyers who make a small down payment: Paying a small down payment on your auto loan increases the amount you owe to your lender. In this case, getting GAP insurance can be a sound financial move.
- Owners of high-mileage vehicles: If your vehicle has racked up a lot of miles, you can expect it to depreciate more quickly than you can pay off your car loan. GAP insurance can protect you from negative equity.
- Owners of sports cars: Sports cars are known to lose their value at a faster rate than ordinary vehicles. If you own one of these cars, you may want to buy GAP insurance to minimize your financial losses in the event of a severe crash or theft.
- Car owners whose auto loans cover other products: GAP insurance is also worth your consideration if your auto loan includes other products, such as debt from another car loan or an extended auto maintenance agreement. Such additions increase the difference between the amount you owe and the value of your vehicle.
How Much Is GAP Insurance?
The cost of GAP insurance varies depending on the underwriter you choose. If you plan to buy this type of insurance from a lender or dealership, you have to be prepared to pay more. These providers typically charge a flat rate of $500 to $700, which is significantly higher than the overall cost of getting the coverage from an insurance company. Additionally, you’ll be paying interest on the price of the policy since it will be rolled into your auto loan.
An insurance company, on the other hand, charges an annual premium of $20 to $40 for GAP insurance if you bundle it into one of your existing policies. By doing so, you’ll only increase the cost of your collision and comprehensive insurance by about five or six percent, making it a lot more affordable. If you prefer to purchase a standalone GAP insurance policy, you’ll probably have to pay $200 to $300.
Besides the underwriter, an array of other factors can have an impact on the cost of GAP insurance. These factors include your location, your auto insurance claims history, and the age and value of your vehicle. If you live in an area where car insurance is comparatively costly, drive a new car, or have made one or more car insurance claims in the past, you can expect to be charged a higher rate.
GAP coverage isn’t expensive, but it can potentially save you a substantial amount of money if you get involved in a major accident or have your car stolen. If you feel that you need this type of coverage, make sure you shop around for the best rates before you buy.
At FIXD, our mission is to make car ownership as simple, easy, and affordable as possible. Our research team utilizes the latest automotive data and insights to create tools and resources that help drivers get peace of mind and save money over the life of their car.
