What is GAP coverage?
The unfortunate truth about purchasing a new vehicle is that most depreciate in value by 20% the first year you own them. If your vehicle is totaled in an accident or stolen and you still have a car loan on it, it's important to know your responsibilities and how you can lessen the impact to your wallet.
Standard insurance covers the current market value of your car, not the current loan balance for which you're still responsible. After an accident, you might hear that you're "upside down" in your loan meaning you owe more than your car is worth. GAP covers that difference.
Helping you decide
Let's say you purchase a $20,000 car and it gets totaled in an accident with $18,000 remaining on your loan. If the car is valued at $15,000, that's all the insurance will pay and you'll be responsible for the $3,000 remaining on the loan but have no car to drive. GAP coverage would pay that difference.
However, you must continue to make your monthly payments until the GAP coverage is settled—you wouldn't want late payments to reflect negatively on your credit score. It's important to note that GAP coverage doesn't pay for late fees, additional interest accrued from late payments or account extensions.
Who should get it?
You need to have at least the minimum amount of auto insurance your state requires. GAP coverage is optional but you should consider it if you:
- Leased your car
- Put down less than 20% as a down payment
- Borrowed more than the purchase price due to taxes, registration and vehicle service contracts
- Financed your car for 60 months or more
- Have a high interest rate
- Plan on driving more than 15,000 miles annually
Before buying a car, check the Kelly Blue Book ® value of last year's model and compare it to your purchase price. Use that to determine its depreciation rate to help you decide if GAP coverage would benefit you.