GAP was designed in the early 1980s to protect you from having to pay for negative equity.
What is GAP Insurance?
GAP, short for "Guaranteed Asset Protection", isn’t actually ‘insurance’ at all— it is another form of extended vehicle protection! GAP covers the difference between what your insurance company will pay and how much you owe the bank if you ever have a total loss insurance claim. Whether your vehicle was stolen, you were hit by an uninsured motorist, or you were subjected to hail damage or flooding, your insurance company will typically give you the Actual Cash Value (ACV) when they pay your claim. If this value is less than the amount you still owe to the bank, you are left to pay the difference by yourself.
GAP was designed in the early 1980’s to protect you from having to pay for negative equity, and it also covers your insurance deductible up to $1000. This ensures that you aren’t liable to pay even a penny out of pocket if you find yourself in this unfortunate situation. It’s hard enough to have a total loss, and the last thing you want is to have to pay for someone else’s mistake.
Negative Equity Can Get Bad Quickly
Negative equity, also referred to as ‘being upside-down’ on your car loan, occurs when you owe more on your car than it is worth. This can result from a multitude of different circumstances, but here are the most common:
- Depreciation was faster than you could pay off your loan. It’s hard to imagine that you can be making your car payments on time every month for 2 years, but that your balance has hardly changed. ***see Dangers of High Interest Loans*** If you are paying an interest rate of 18% or higher, the vast majority of your payments for the first 24 months are going straight into the bank’s pockets in the form of interest. Unfortunately, the principal loan balance that you still owe on your vehicle may have only reduced by a few thousand dollars, and if you’ve been driving your car or truck and the mileage has been going up, then the trade-in value has been going down. In short, your vehicle could potentially be depreciating faster than your loan is changing.
- You had to take a loss on your trade-in. The unfortunate situation in example 1 can oftentimes lead to an even deeper hole to try and dig yourself out of. If you traded-in your last vehicle for a new one, and you were upside-down in the old loan, then chances are that negative equity was rolled into your new car loan. It may have gotten you into a nicer car that you like driving more, which is great, but you’re still carrying that negative equity. Plus, negative equity means higher risks, and higher risks equal higher interests rates that you’ll probably end up paying on your new loan. If this is the case, take solace in the fact that you’re not alone. Millions of Americans are also in your shoes, and the least expensive way to make sure that you don’t have to ‘pay the piper’ before you’re financially prepared to, is to protect yourself with a GAP policy.
- You had a total loss, and didn’t have protection. If this is the case, chances are you have GAP on your current loan, and you will have it on every other future loan for the rest of your life. Sometimes, we just have to learn from experience. If you find yourself in a situation where you still owe the bank several thousand dollars for a car you can’t even drive anymore, you can usually get a dealership to work with you so you can roll this unpaid balance into a new loan, similarly to example 2. However, if your credit isn’t exactly perfect, this can sometimes be a challenge, as financing negative equity is a dangerous risk for the lender as well. ***See 3 C’s of Credit*** If this is the case, you are currently in a tough position because you still need to make payments on that old loan, or else you risk hurting your credit profile even more. This can make the next car buying process a bigger challenge and so on, and so forth.
All of the risks above can be mitigated by having a GAP policy on your loan. If you’d like to see how much your car is worth, click on Get Started below.
Is It Possible I Don't Need GAP On My Loan?
Like Vehicle Service Contracts, GAP policies aren’t needed by everyone. If you are paying off your loan and have no risk of negative equity, then GAP might not be for you. There are many considerations when deciding on if a GAP policy is the right choice, but here are a few factors that may point to you not needing GAP:
- You put a substantial amount of money down when you purchased the vehicle
- As a result, you financed at a competitive interest rate from the beginning
- You diligently overpay on your monthly minimum payments
- You have an 80% Loan-To-Value (LTV) Ratio
If you’re unsure on whether GAP is right for you, remember that as your car gets older and has more mileage, depreciation will continue to reduce the trade-in value that your insurance company will pay. If you have a high insurance deductible in order to have a cheaper monthly premium, GAP would pay for itself two times over just by covering your deductible up to $1000.
Finally, GAP and VSC’s are prorated, cancellable, and refundable at any time, so you’re not exactly marrying this contract. Ultimately, this is your car, and we aim to provide you with the all of options and resources you need to make a decision that is best for you.
If have questions on whether you should buy extended protection on your auto loan in the form of GAP or a VSC, feel free to Contact Us, and one of our no-commission support specialists will be happy to help!
