If you’re making car payments, Guaranteed Asset Protection (GAP) is a type of coverage that can save you a ton of money if your car is lost or totaled. Let’s explore what GAP is and what it covers.
What is GAP?
GAP stands for Guaranteed Asset Protection. It is an optional policy for auto loans that helps to protect you in the case of a total loss or stolen vehicle. Since cars tend to depreciate after purchase, you may owe the lender more than the vehicle is worth.
Imagine getting into a car accident and totaling your car. If you still owe your lender more than your car’s value, you will have to keep paying for a vehicle that you no longer have. However, if you have GAP, the coverage should help pay the difference.
Who Needs GAP?
GAP coverage makes the most sense for someone who finances their car in a way that leads to the car’s value being worth less than balance of the loan.
For example, if you make a smaller down payment or choose a longer finance plan, like 60 months or more, GAP could be a good choice. GAP coverage is also common for leasing a vehicle or purchasing a vehicle that depreciate quickly.
Keep in mind, even if you need GAP coverage at the beginning of your lending period, you could always cancel the policy when you reach the point of owing less than the book value of your vehicle.
What Does GAP Cover?
A GAP policy is coverage for the difference between what your vehicle is worth and what you owe the lender. Coverage is for the loss of a vehicle, whether that is through theft or if the vehicle is deemed a total loss after an accident.
Here’s how it works. Let’s say you owe $10,000 on your auto loan, but the market value is $6,000. After totaling your car in an accident, your collision coverage takes care of the $6,000. If you have GAP coverage, it could help cover the remaining $4,000. If you don’t have GAP, you would have to pay the $4,000, even if you no longer have the car.
Having to continue making payments on a car you don’t have can be really hard, especially if you need to get a new vehicle as well. So GAP coverage is an easy way to protect yourself from a potentially stressful financial situation.