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What Is GAP Insurance + What Does It Cover?


GAP insurance is one of those things in life that you never hear about until you need it. If your car is wrecked or stolen, GAP – or Guaranteed Asset Protection – insurance can mean you walk away debt-free instead of owing money on your auto loan. 

After all, why would you want to keep making monthly car payments when you no longer have a car? You want to be able to focus on moving forward and getting a replacement vehicle. 

Read on to find out more about GAP insurance, what it covers, and whether you're in a situation where you should get it.

GAP Insurance: The Basics

When you take out an auto loan, you'll probably be offered a GAP insurance policy as a protective addition. But what is GAP insurance and what does it cover?

What Is GAP Insurance?

GAP insurance does what it says it does: it bridges the gap between your insurance coverage and the amount you owe on your auto loan. A few highlights of GAP insurance:

  • GAP insurance is an add-on you can get from your credit union, an insurance company or the dealership where you bought your car.
  • It's designed to protect you in the event your car is written off or stolen and you still have a balance on your auto loan to pay.
  • Your insurance company will pay out the actual cash value of your car and your GAP insurance policy will cover the remaining balance on your auto loan.

What Does GAP Insurance Cover?

Most goods lose value over time in a process known as depreciation. Cars lose value more quickly than most other items you buy. In fact, a new car can lose 20% or more of its original value within the first year!

This means that after you drive your car off the lot, it's possible to owe more on your car loan than what it's worth. In the event your car is stolen or written off, your insurance company will consider the current market value of your car at that time. It will not consider what you paid for it. 

So, GAP insurance covers the difference between what your insurance company will pay you for the loss of your car, and what you still owe on your auto loan.

How Does GAP Insurance Work?

GAP insurance is a simple numbers game between the balance on your auto loan and the value of your car at the time it's lost. 

The best way to understand GAP insurance is by looking at an example: 

  • Let's say you buy a car for $20,000 and it gets totaled when you still owe $18,000 on your auto loan. 

  • Due to depreciation, your insurance company decides the actual cash value of your car is just $15,000. 

  • This means you still owe $3,000 on your auto loan even though you no longer have a car.

  • Your GAP insurance policy will cover you for the balance of $3,000 -- so you'll owe nothing.  

When You Should Get GAP Insurance

Not everybody needs GAP insurance. If you own your car outright, you definitely don't need it. And if you have a small balance remaining on your auto loan, you can probably go without. 

You should consider getting GAP insurance if:

  • You're at the beginning of your auto loan term and have a long way to go.

  • You made a small down payment on a large loan.

  • You bought a brand new, high-value car that will depreciate quickly.

  • You have high mileage on your car, which speeds up depreciation. 

  • You have rolled other loans or dealership add-ons into your loan, so the total is higher than your car's value. 

It's a great idea to get GAP insurance from the same credit union where you get your auto loan so everything is in one handy place. Adding GAP insurance through your credit union should save you money as well. A one-off fee for GAP insurance at a car dealership can cost as much as $700!

The Bottom Line: GAP Insurance and What It Covers

Nobody wants to think about being in a car accident or having their vehicle stolen. But, with GAP insurance, you won't need to worry about your auto loan and you can focus on taking care of everything else. And, at OUCU Financial , we can help you determine if GAP insurance is for you. 

As a member of a credit union, your needs and circumstances are given top billing. This means we help you every step of the way. So, once you’ve settled on your auto loan, be sure to click below to find out the best time to buy a car. There may be more to it than you think!

What's the Best Time to Buy a Car?

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