Buying a new vehicle is exciting, but the moment you drive it off the lot, its value begins to change. In some cases, you may owe more on your auto loan than your vehicle is actually worth. That is where GAP insurance can help.
GAP, or Guaranteed Asset Protection, is coverage that may be available through your auto insurance policy. It is designed to help cover the difference between what your insurance company pays for your vehicle after a covered total loss and the amount you still owe on your vehicle loan or lease, subject to the terms and limits of your policy.
For example, imagine you owe $30,000 on your vehicle, but after a covered total loss, its actual cash value is determined to be $26,000. Depending on your policy, GAP coverage may help with that $4,000 difference.
Sounds simple, right? There is an important detail that drivers need to understand.
The amount financed when you purchase a vehicle is not always the same as the amount you financed for the vehicle itself.
When purchasing a car, you may choose to finance additional products, such as an extended warranty, service contract, maintenance plan, or other dealer add-ons. You may also roll negative equity from a previous vehicle into your new loan.
Those amounts may be part of your total loan balance, but that does not necessarily mean they are considered when your auto insurance company's GAP coverage responds to a total loss.
For example, suppose you purchase a $30,000 vehicle but your total loan ends up being $37,000 because you financed a warranty and rolled negative equity from your previous vehicle into the new loan. If that vehicle is later totaled, you should not assume your auto insurance GAP coverage will pay the entire difference between the vehicle's value and that $37,000 loan balance.
Depending on the specific policy, amounts associated with warranties, service contracts, prior loan balances, and other financed products may be excluded or otherwise limited.
That distinction can leave you responsible for part of a loan even after the vehicle itself is gone.
Before signing for a vehicle, take a close look at the entire amount being financed. Ask which costs are associated with the new vehicle and which are coming from additional products or debt from a previous vehicle.
It is also important to understand that GAP products offered by dealerships or lenders may work differently from GAP coverage added to an auto insurance policy. Coverage, exclusions, limits, and eligibility can vary.
Your insurance professional can help you understand how the GAP coverage available through your auto policy works and what you should consider before relying on it.
At Rathbun Insurance, we believe understanding your coverage before you need it matters. If you're purchasing or financing a vehicle, talk with your insurance professional about GAP coverage and make sure you understand both what it covers and, just as importantly, what it doesn't.