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GAP insurance (or GAP coverage) is also known as Loan/Lease coverage, established in the 1980s, GAP insurance provides protection to automobile owners from the sudden drop in automobile value, market trends, and accident compensation.

GAP insurance is particularly important when a consumer buys a new automobile, or leases an auto from an automobile dealership. Most consumers cannot afford to buy an automobile outright, especially a new auto, so they are faced with taking out a loan in order to cover the initial cost. Although taking out a loan for a necessity such as an automobile is not unintelligent in and of itself, it leaves the consumer open to economic hurt if their automobile is totaled or stolen after only a small amount of their loan has been repaid.

A car can devalue anywhere from 10% to 28% as soon as it is driven off the lot. This leaves a period of time open where the amount owed on the loan exceeds the value of the auto. For instance, if you purchase a auto for $20,000, within a year it could be worth only $17,000, while you are still making payments on the initial sum.

The problem with the devaluation of the consumer’s automobile, is that if the consumer then is involved in a traffic accident, and their automobile is totaled, they will be stuck repaying $20,000, but possibly only receive $17,000 from their insurance company, or whatever the quoted value of the auto might be. This leaves the consumer with a “GAP” of $3,000 between the insurance payout, and the loan payments.

This substantial depreciation in automobile value, coupled with the troubling loan repayment, spawned the creation of GAP insurance. GAP insurance provides consumers with a payout for the “gap” that is created between the value of their automobile as quoted by their insurance agency and the total value of their loan. Most automobile dealerships will add this policy on at a low cost, which survives for the lifetime of the loan payments. GAP insurance should be available to every automobile consumer either through the dealership where the automobile was purchased, or through the consumer’s insurance company.

Please take some time to read your insurance statement, this can provide valuable insight into possible GAP coverage that is available for you. However, if your insurance policy states that the company will pay off your financed amount, then GAP insurance is not necessary. GAP insurance need not be purchased immediately after sale of the automobile, although this is the time where the depreciation is most apparent. Also, discuss with your insurance company as to whether you will need to upgrade to collision or comprehensive coverage in order to qualify for GAP insurance.

As always, please take the time to discuss the matter with the automobile dealership you are financed through, and your insurance company. The more informed you are as a consumer, the more empowered you will feel as a person.

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