Extra coverage is waiting in the wings.
First, what exactly is GAP insurance? No, we aren’t referring to the clothing store with the boyfriend chino’s you’re so fond of. GAP stands for Guaranteed Asset Protection which, in a nutshell, is extra insurance to cover a potential loss on your vehicle.
It’s sort of like having an insurance standby or reinforcement on your current insurance policy. The coverage pays the difference – or “gap” – in what you may owe on the loan versus what your insurance company pays if there is a total loss.
Different from collision or comprehensive coverage.
GAP coverage is sometimes called loan or lease payoff coverage; it’s different from collision insurance, which pays for repairs or replacement. Comprehensive auto insurance covers both collision and theft, but it won’t cover the “gap” that may occur between what your insurance company pays on the claim and what you owe on the loan.
In a perfect world, full-coverage insurance would cover any loss due to an accident or theft. Unfortunately, it doesn’t. One reason is that vehicles depreciate at a much faster rate early in their lifecycle. And when you have a larger loan balance, insurance may not cover all of what you owe. Instead, the insurance company may settle for an amount it believes the vehicle is worth at the time of the loss – usually less than what you owe on the loan.
GAP insurance pays the difference if…
- Your car is totaled, and insurance doesn’t cover the loan balance
- Someone steals your car, and you still owe on the loan after your insurer pays the claim
How a gap in coverage occurs.
Our friends at carinsurance.com explain perfectly how the notorious “gap” in coverage happens. Here is their example using fictitious numbers:
- You choose a car that costs $25,000, and you drive it off the lot.
- After paying the down payment, you owe $24,000 in car payments over five years (0 percent interest loan = $400 car payments).
- You purchase physical damage insurance (comprehensive and collision) with a $500 deductible to protect you against damages and loss.
- You have an accident while you are still upside down on your loan or lease (meaning you owe more on a car than it’s worth), and your vehicle is totaled.
- The insurance company determines that the actual cash value of the car is only $22,000, but at the time of the loss, you still owe $23,500.
- GAP insurance should pay the difference plus your deductible, totaling $2,000 in this case. (Note: not all GAP policies pay the deductible.)
Also according to carinsurance.com, a new car depreciates so quickly that it may be worth 10 percent less within minutes of driving off the lot (Yes, it’s true.) In the example above, if you owned the car for just three days, had physical damage coverage and the car was totaled, you could owe 10 to 20 percent of the $24,000 ($2,400 to $4,800 out of pocket) even though you purchased “full coverage.”
What you might not have considered:
Many financial institutions will offer GAP coverage only at the time the loan is closed. But at Advia, we can provide coverage to an existing loan we’ve already disbursed. If a member decides to purchase it after their loan has closed, they can do so by paying for the expense out of pocket. (Not all insurers offer this convenience.)
Anyone who hasn’t made a significant down payment on a vehicle and has an auto loan or lease should investigate GAP coverage. Coverage can typically be purchased for most any vehicle you finance and insure – including cars, boats, and RVs, though there may be restrictions on commercial vehicles. It can also cover your insurance deductible or provide a down payment on your next vehicle. At Advia, GAP coverage offers down payment amounts of up to $1,000.
Advia Member, Nicole, recommends GAP coverage.
What happened: Nicole bought her car in January of 2016. It was actually a “gift” for her husband as his credit was not so good. As Advia worked on a plan to improve her spouse’s credit, Nicole selected financing options for the vehicle and decided to purchase the GAP coverage as a safeguard. Just a few short months later, her vehicle was totaled.
The good news: No one was seriously hurt, and Nicole was able to make the GAP claim, which paid the remainder of her loan balance within two weeks. With this settled, Nicole and her spouse found a new vehicle, financed by Advia, and from her GAP benefits, were able to make a down payment towards a new car. Because of her spouse’s credit clean-up, Advia was able to add him as a cosigner which will continue to improve his credit.
The specifics: When Nicole purchased her vehicle in January 2016, the vehicle was valued at $7,925, and the loan closed for $7,952.30 (100.34 percent Loan-to-Value) which included GAP coverage. On April 23, 2016, Nicole totaled her vehicle. The remaining balance on the loan was $7,640.70, and insurance only covered $6,275.16. With her GAP policy in place, Advia paid the deficiency balance of $1,365.54 and $1,000 towards a down payment on a new vehicle purchase.
GAP coverage isn’t magic; it’s peace of mind.
While it won’t prevent you from getting into an accident or make your car invisible to would-be thieves, GAP insurance WILL provide added security for your car loan or lease, which, for most of us, is a very large investment. And these days, a little peace of mind goes a long way. See us at Advia if you need help comparing your financing options, and to find out if GAP coverage is right for you.
Contact us at 844.ADVIA.CU (844.238.4228).