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Let’s say you do everything right with your car. You have appropriate amounts of auto insurance and drive carefully. Yet, the unthinkable happens, and you get into an accident, one in which your vehicle is significantly damaged. The insurance company will then review and determine if the cost of repairs will outweigh the value of your car, commonly known as ‘totaling’ a vehicle. If they decide that this is the case, you’ll likely receive a payout based on the kind of coverage that you have. But if it turns out that the amount of this payout isn’t enough to cover what you currently owe on the loan, then what? This is where guaranteed asset protection (GAP) insurance comes in. 

What is GAP Insurance?

Let’s go back to the above situation where the payout is less than the amount you owe on your auto loan. This would be a negative equity situation; you might also hear it called being “upside down” or “underwater” on a loan. No matter what you call it, it’s a frustrating situation to be in.

And in this case, GAP insurance can be a real lifesaver. A GAP policy will ensure that you will receive the difference between the outstanding balance on your loan and your auto’s actual cash value (ACV); the latter is what your insurance company typically pays out if your vehicle is totaled (thanks to comprehensive or collision coverage). GAP insurance also kicks in if your car is stolen and not recovered (usually after 30 days with a police report). 

Note that the ACV is not the same as the vehicle’s original price. 

How Does GAP Insurance Work?

Here’s an example of how GAP insurance works. Say you bought a new car for $40,000, but then some time later, your car is totaled in an accident, and you still owe $30,000 on your auto loan. In this scenario, let’s say your insurance agrees to pay the lender what your car is worth, but uh oh, you find out that it’s only going to be $28,000. 

You’d be responsible to cover $2,000 to settle your car loan. But GAP insurance would help pay that amount towards your loan. Note, this scenario is hypothetical and deductibles still apply. Not all GAP insurance policies will pay 100% of the difference between the car’s ACV and outstanding loan amount. 

Is GAP Insurance Worth It?

GAP insurance is worth saying yes to if any of these situations apply to you:

• Small down payment size: GAP insurance is especially a good idea if you’ve put down less than 20% on your auto loan. The reality is that the value of a vehicle can drop as soon as you drive it home, known as depreciation (as much as by 20% in the first year and 40% after five years). So, unless you’ve paid a large down payment, it isn’t unusual to owe more on your loan than the car is worth faster than you think.
• Long-term auto loan: Many people opt for 60-, 72-, or even 84-month car loans thanks to their lower monthly payments. As you make car payments, your car continues to depreciate and you’re paying more interest at the beginning of your car loan, so it’s more likely that you’ll be underwater on your car loan. 
• Leasing a car: GAP insurance will help cover your remaining leasing payments after comprehensive or collision coverage pays out the vehicle’s ACV in the event the leased car was totaled or stolen. 
• High-mileage car: Unfortunately, the more miles on the car, the more it depreciates due to the potential cost of repairs, which is what makes it another good reason to have GAP insurance. Psst, Mechanical Repair Coverage can help you save lots of money for repairs.

Some models, makes, and types of cars depreciate faster than others, especially due to the market. You can check the estimated value of a car with Kelly Blue Book at kbb.com. 

How Much Does GAP Insurance Cost?

The cost of GAP insurance depends on a number of factors, such as the insurer, your location, the vehicle’s age, the vehicle’s actual cash value, and auto insurance claims history. You could see if your insurance will bundle it into an existing insurance policy, or you could buy it a flat rate (usually anywhere from $500 to $700) with a lender or dealership, who will roll it into the loan. It doesn’t hurt to shop around for quotes for the best price, but again, deductibles, coverages, and other benefits will vary. 

What Does GAP Insurance Not Pay?

Keep in mind that GAP insurance doesn’t replace vehicle insurance, and it also doesn’t cover the following: 

• property damage
• bodily injuries
• liabilities
• repairs or replacement parts
• reduced value of your car due to damages in an accident if not totaled
• the difference between the car’s actual cash value and the outstanding balance on a loan/lease for engine failures

Friendly reminder that this isn’t an exhaustive list of everything GAP insurance doesn’t cover. 

Additionally, GAP insurance doesn’t cover the cost of purchasing a brand-new replacement vehicle, so it’s a good idea to look into adding new car replacement coverage to your insurance policy.

Who Offers GAP Insurance?

In most cases, you can get GAP insurance through your auto loan lender or car dealership while you’re setting up the financing for your new set of wheels. You may also be able to get it directly through your own insurance provider or separately through another insurance company—it’s best to check if it’s available before buying the car to see their requirements. 

If you’ve already bought your car, you may still be able to get GAP insurance with an insurance provider before your loan is paid off, but you face the risk of not meeting their eligibility criteria. Plus, it’s better to get it when you buy the car to ensure you’re covered before it’s too late. If you’re leasing a car, be sure to check that the contract includes GAP coverage. 

The good thing about GAP insurance is that once you owe less than the car’s actual worth, you can drop the insurance. And get this, if you paid for the full amount of GAP insurance policy upfront and later sell the car, you may be able to get a refund for the unused portion of your GAP insurance policy. 

Consider GAP Insurance with Your Auto Loan at SCCU

Fortunately, GAP coverage is fairly inexpensive, and—if you finance your vehicle with SCCU—we’ll roll it into the cost of your loan. You can also get GAP insurance for a recreational vehicle too. 

It’s easy to apply online for your auto loan at SCCU, and we offer a fast pre-approval process so you know how much car you can afford before you go shopping. Plus, we offer low credit union rates for new and used vehicles, no application fees, simple electronic closing, no pre-payment penalties, and more. 

SCCU is the third-largest credit union in Florida, with more than 60 branches and free online and mobile banking.⁶⁰ As long as you live or work in any of these 34 counties, it’s easy to become a member with a $5 deposit in a Share Savings account. 

Learn more about pre-approved auto loans at SCCU!