What to know if you’re financing or leasing a car By DANIEL KURT Updated July 22, 2022 By ANDY SMITH “Gap” stands for “guaranteed auto protection” in the insurance industry.
When a loan taken out to buy a car is worth more than the car itself, this kind of insurance is only necessary for a short time.
If the car were to be totaled in an accident, the insurer would be responsible for paying back the difference with gap insurance. This is not covered by standard auto insurance.
For instance, if you didn’t put any money down when you financed or leased a car, the amount you borrowed may be greater than the car’s total cost for a few years.
Standard car insurance will only pay you the current value of the vehicle if it is stolen or damaged in an accident, so you will lose money on paying back the original loan or lease. This “gap” between the car’s depreciated value and the loan balance is covered by gap insurance.
Whether you need car gap insurance depends on whether you buy or lease a car. However, is gap insurance valuable? If you think you owe more on a vehicle than your comprehensive auto insurance policy would cover in the event of a claim, this could be the case.
The most important takeaways are that gap insurance—also known as guaranteed auto protection—reimburses a car owner when the total loss payment is less than the balance on a loan or lease.
When the loan value is greater than the total value of the vehicle being leased or financed, gap insurance is only required for a brief period of time. If the car were to be totaled in an accident, the insurer would be responsible for paying back the difference with gap insurance. This is not covered by standard auto insurance.
If you don’t have any money down and want a long time to pay it off, gap insurance is the best option for you. They might owe more on the car than its current value for a few years.
It also makes sense for people who lease vehicles rather than buy them.
If you buy a car with a down payment of at least 20% and plan to pay off the loan in less than five years, you may be able to skip gap insurance.
For as long as your loan balance does not exceed the car’s value, gap insurance is not required.
