If you’ve been in the market for a car or have purchased one in the past you may have heard this term but not really known what it means. Technically GAP is an acronym for “Guaranteed Asset Protection” but we aren’t trying to be technical here, so let’s move on to the simplified version.
Simply put, GAP insurance covers the “gap” between what you owe on a car and what your insurance company will pay in the event of a total loss.
Still not sure what it means? Here’s an example: Let’s say you get in an accident and your insurance company decides your car is worth $8,000 but you still owe the bank $10,000. So, you take your $8,000 check down to the bank and are faced with an ugly truth: you are still responsible for the payments on the remaining balance of a car you can’t even drive. The bank doesn’t care that you are stranded without a car and could really use that money to put toward a new car, they just want their payment.
This is where GAP Insurance would come in. Gap insurance would pay that $2000 off for you, leaving you free to worry about what car you’re going to buy next instead of how you are going to make 2 loan payments.
That being said, not everyone needs the coverage. The only time you need to worry about this is if you are going to owe the bank more than the car is worth. So, long term loans (over 48 months) would fall into that category (because cars depreciate much faster than you pay them off), as would high interest loans in which you only made a small down payment. Every situation is different, and only you can determine if it’s right for you.
Hopefully this helps you understand what GAP insurance can do for you. Check back for more articles like this one and comment if there are any topics you’d like to see covered.