What is GAP Insurance and Do You Need it?

June 12, 2023

Imagine this, you successfully secure a car loan and buy a brand new car for yourself. You drive it around for a year and enjoy owning your dream car. However, one fine day, your car gets stolen, or worse, totaled and written off.

What do you do in this situation? You approach the insurance provider.

Now understand this: your car's value depreciates the moment it leaves the showroom and hits the road. Considering that you've been driving this car for well over a year, which means if, for instance, you bought the car for $50,000, your insurance will only cover about $42,000. This is because insurance typically pays out the car's actual cash value at the time of loss.

What about the remaining $8,000 that you owe on the car loan? Unfortunately, you'll have to pay off that amount out of your pocket.

So, basically, now you don't own a car, but you still have to make the payment. It doesn't sound fair, does it?

Here's where GAP Insurance comes into the picture.

What is GAP insurance and how does it work?

GAP stands for Guaranteed Asset Protection, and it's optional insurance designed to cover the "gap" between what you owe on your car loan and the actual cash value of your vehicle in case of a theft or accident.

Simply put, when your loan amount exceeds your vehicle's worth, gap insurance coverage pays the difference.

If you make a small down payment, less than 20% of the car's price, there's a chance you'll owe more on your loan than the car's actual value. This is called negative equity. In the event of a total loss, like an accident or theft, the insurance payout may not cover your remaining loan balance.

GAP insurance is important in this situation because it covers the difference, ensuring you're not stuck paying for a car you no longer have. Considering GAP insurance can protect you from potential financial troubles in such cases.

Read: What is Deductible Insurance?

Who should buy GAP insurance?

If you plan to lease or finance a vehicle, it's worth considering GAP insurance. It can be especially valuable if you're putting little money down or if you're purchasing a pricier car that tends to lose value quickly.

GAP insurance becomes even more appealing if you're going for a longer loan term, which many people do nowadays. If you'll carry a balance on your loan for 60 months or more, GAP insurance provides an extra layer of security and peace of mind.

In simple terms, GAP insurance is a smart choice for those who are leasing, making small down payments, and choosing longer loan or lease terms. It's there to protect you from potential financial setbacks and ensure that you're able to handle the significant gap between what you owe on your vehicle and its actual value.

How much does GAP insurance cost?

Determining the exact cost of GAP insurance can be challenging, but estimates suggest it's typically around five percent of the cost of your collision and comprehensive insurance. The price can vary depending on the type of vehicle you're driving, ranging from approximately $350 to $800.

If you choose to include GAP insurance in your monthly payments for a 60-month loan, the additional cost might range from 5 to 15 dollars per month. Considering the potential savings it can provide, this investment is well worth it for most shoppers. In the event of an accident or theft, GAP insurance could save you thousands of dollars.

Read: How to Get Cheaper Car Insurance in Canada

Where can you buy GAP insurance?

GAP insurance is available for purchase at car dealerships and certain insurance companies.

However, before you head to the dealership to buy your new vehicle, it's a good idea to contact your insurance company first and request a quote for GAP insurance. This way, when you're at the dealership and they offer to include GAP insurance in your monthly vehicle payment, you'll have a second quote to compare it to. In many cases, purchasing GAP insurance directly from an insurance company is less expensive than buying it from a dealership.

What is excluded from GAP insurance?

GAP protection exclusions can vary, but here are four common ones to remember:

Non-factory modifications are typically not covered.
Extended warranties, unpaid payments, and financial penalties are excluded.
Basic coverage is usually required for eligibility.
Money put down for lease or trade-in may not be included.

Make sure to review your specific GAP protection policy to understand the exclusions that apply to you.

Do you need GAP insurance?

Here are some situations where it makes sense to get gap coverage:

Leasing a car: Lenders often require gap insurance for leased vehicles.
Low down payment: If you made a down payment of less than 20% on a new car, you could have negative equity right after purchase.
Long financing term: The longer your car is financed, the higher the chance of owing more than its worth.
Protection against depreciation: Some cars depreciate faster than others, so knowing your vehicle's depreciation rate can help decide if gap coverage is necessary.
Protection against negative equity: If you owe more on your loan than your car's value at renewal, gap insurance protects you from negative equity.