3 Things You Need To Know About Gap Car Insurance Coverage

Updated: Sep 27, 2021

Gap car insurance coverage protects car owners from paying residual loan amount, in case their car gets totaled in an accident or is stolen.

Gap insurance, as the name suggests covers you for the gap that appears between the Actual Cash Value (ACV) of your car and the loan amount still due on it. GAP insurance is very crucial if your vehicle is declared ‘totaled’ after a terrible accident. It also kicks in if the car is stolen and is not recovered. Through this article, we will share with you everything that you need to know about GAP Car Insurance coverage.

What is Gap Insurance?

Gap insurance is an add-on insurance cover for your vehicle. It is not compulsory but can be very helpful in case the car gets totaled. The actual value of cars depreciates very quickly. Different factors that affect the market price of your car are age, mileage, physical condition, etc. The actual market price of your car may get to half of its original cost within a couple of years.

If you buy or lease a car on a long-term loan, the depreciated value of your car may get lower than the loan amount still due on it. This situation is termed as negative equity or being upside-down. If the car gets totaled at this point, the insurance company is liable to pay only for the fair market value of your car before the collision. This means that out of the total loan amount, Only the Actual cash Value of your car will be paid through insurance money. You will be required to pay the residual loan amount from your own pocket.

At times, the lender may compulsorily require GAP insurance coverage to finance your car. When you lease vehicles, GAP insurance is mostly included in the Lease cost already. However, you should check the paperwork and make sure it’s incorporated.

How is gap insurance related to your car salvage value?

The salvage value of car is the amount that can be generated by dismantling the car and selling its metal and parts. Car salvage value is calculated by the insurer in case of an accident to determine if the car should be considered totaled. If the value comes out to be higher than the actual cash value of the car, it’s declared totaled.

When should you consider taking GAP insurance?

GAP insurance is optional for your vehicle thus not mandatory by law. Check the following points to check if you need GAP insurance protection.

  • If you paid less than 20 percent down payment while purchasing your vehicle. It implies that 80 percent of the car price and the interest on it constitute the loan amount. This increases the risk that the car’s actual value gets lower than the loan amount.

  • In case, your car loan is longer than 60 months. It can put you in a situation of negative equity. After a few years, the due loan amount may get higher than its market price.

  • While leasing vehicles, you should make sure that the lease contract includes GAP cover.

If any of the above situations exists, it’s better to have GAP insurance coverage for your vehicle. If an unfortunate incident of accident or theft occurs and you lose your car, you won’t have to worry about paying the residual debt at least.

What happens if you don’t have GAP insurance for your vehicle?

Collision insurance provides you ample security in case of minor accidents and collisions. They generally pay for the body damage repairs, but they may not be of much help in certain cases. If the loan amount due on your car is high whereas the market value of your car is low, not having GAP insurance coverage can cost you very dearly. After a serious accident, your insurance company will calculate the Actual Cash Value of your car, its salvage value, and repair costs.

The Actual Cash Value (ACV) is determined by estimating the market price of the car prior to the collision. The cost of repair includes the cost of replacing damaged parts and associated labor costs. After taking out deductibles from the ACV, if the amount is lower than the salvage value plus repair cost, your vehicle will be considered totaled.

The insurance company will pay your lender the Actual Cash Value amount minus the deductibles. You will have to pay the residual loan to the lender even if you don’t have your car anymore.

Let’s take an example to understand this better. Let’s say you bought a car worth $35,000 and the present ACV is $20,000 when you still owe $25,000. If deductibles are $500, the settlement amount after the accident will amount to be $19,500. This settlement amount is $5,500 less than the loan amount due on your vehicle. If you don’t have GAP insurance coverage, you will have to pay this amount from your own pocket.

Is Gap Insurance helpful if someone hit my parked car and left?

Such an incident is termed as Hit and Run. If the other driver is identified, you can file damage claims from the driver’s insurance company. If the driver is not identified, the usual process will be followed by your insurance company. In such cases, GAP car insurance coverage can save you from paying the residual loan in case the car gets totaled.

Does Gap Insurance cover body damage such as fender repair or bumper repair costs?

Gap insurance is optional car insurance that kicks in under specific circumstances only. It does not cover the body damage repair costs.

Other key points regarding Gap Car Insurance coverage

There are a few other key points that you should know about GAP car insurance coverage. These are listed below for you:

  • You will have to pay deductibles for your insurance claim even after having GAP car insurance coverage.

  • For vehicles taken on lease, the GAP insurance payment is made directly to the leasing company.

  • If the vehicle was financed, the financing company such as the bank receives the payment.

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