The Common Questions About GAP Coverage
So, you're thinking of leasing a car. You've carefully weighted the risks and benefits of owning versus leasing ans decided on the latter. No matter the reason for that decision, you are still going to need insurance for your new car
. Most likely, this insurance will need to include GAP coverage. But what is GAP coverage and why is it important? Here is the answer to that, and other important questions about a GAP coverage policy.
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What is GAP Coverage?
GAP coverage, which is also called Guaranteed Auto Protection or Guaranteed Asset Protection, is used to protect a vehicle that is being financed or leased.
Imagine you just purchased a brand new Honda Accord for $25,000, drove it for one year before someone rear-ended it and totaled the car. A car can depreciate significantly over the course of a year. The insurance company might say the settlement is worth $17,000, even though you still owe $21,000 on the loan. Where does that $4,000 difference come from? You.
How Does GAP Coverage Help?
Most settlements use actual cash value (ACV).
If your car is totaled or stolen, the insurer will only reimburse you for the ACV instead of what you paid for it. When theres a difference, or gap, between a settlement and the amount you still owe on the loan, that amount is covered under GAP insurance because standard car insurance wont pay the total amount owed. In the example above, your GAP insurance company would cover the $4,000 difference. Without it, you might still owe money on a car and not even have one to drive.
Most auto insurance companies offer gap insurance, but sometimes they call it loan/lease payoff insurance instead of GAP insurance.
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When Should You Buy It?
Drivers only need GAP insurance under certain conditions. Whether or not you get GAP coverage depends on the terms of the loan and how much you can afford for a down payment.
An extended loan, small down payment, or high interest rate loan are all good reasons to consider GAP insurance.
You wont need coverage if you have a short loan, pay off the car in advance, or make a large down payment. It is a good idea to keep an eye on the value of your car.
Once you owe less than the value of the car you can cancel any GAP insurance.