How GAP Can Reduce Your Financial Risk

Many people put themselves at great financial risk by not having adequate auto insurance coverage. Lenders now tend to require additional insurance to pay off any balances owed on car notes in case of accidents.

GAP stands for “Guaranteed Auto Protection,” which is important when leasing a car, especially since there is no major down payment compared to purchasing a car.

In the event of an accident, your insurance policy will only cover the current market value of the car, which means you’re responsible for the amount owed to the finance company. This can create a gap in coverage, burdening you with financial difficulty on top of the stress of the accident itself.

Since depreciation can outpace car payments, GAP insurance is a must when leasing, because it protects you and your financial profile. Fortunately, GAP is already included in the majority of lease contracts. It’s important to clarify whether or not GAP is part of the lease or sale when signing the contract.

The GAP Advantage

Consider the following scenario: you purchase a car for $25,000 including taxes and fees and roll off the lot. One year later, you’re involved in an accident, totaling the car. Since insurance covers the current market value of the car, they pay for $17,500, which reflects a loss of approximately 30 percent of its value within a year. Regardless of the amount left on your loan, with GAP insurance, you’re only responsible for the $500 deductible and they’ll cover the difference.

However, imagine if you didn’t have GAP insurance and you still owed $23,500 on the vehicle. There’s still a $6,000 “gap” between what you owe for the car and the $17,500 insurance will pay. Without GAP insurance, you’re responsible for that payment, even if the car is totaled. The difference is a $500 deductible versus $6,000.

GAP insurance reduces your financial risk by covering damage due to drastic events such as theft, vandalism, fire, hurricanes, floods, accidents, and tornadoes. Generally, your insurance deductible will also be covered. It’s important to note, however, that cars covered by both comprehensive and collision insurance are not covered by GAP. Furthermore, any equipment not factory installed into the vehicle, such as a GPS system, will be excluded from protection.

With so many benefits for GAP insurance, it’s no wonder more drivers and leasers are considering whether they should purchase it – if it’s not already part of their contracts. Consider adding GAP to your policy if:

• You place little or no money down. Whether you’re purchasing a new or used car, the more you borrow, the more you’ll pay in interest. As a result, it takes more time for the loan balance and the cash value of your car to become equal.

• Your loan is 5 years or longer. An extended term increases the payoff amount, which leaves you vulnerable in the event of an accident. In that situation, you might owe more than the car is worth, especially if it’s completely totaled. Having GAP insurance will protect you from this unfavorable situation.

• You have a high interest rate. If you purchase or lease a car with low credit, you might end up with a high interest rate loan. Since high interest rates can inadvertently extend the length of your loan, GAP insurance is an appropriate option.

With so many available insurance options and considerations, it’s important to understand the various ways to protect yourself when purchasing or leasing a vehicle. Whether you have bad credit or are in the process of improving credit, it’s critical to find trusted advice before making a major decision.

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