As we have discussed on the blog, GAP (Guaranteed Asset Protection) insurance covers you when you are upside down – meaning you owe more than the car is worth – and your car is totaled follow a car accident or other claim (theft, etc.). Oftentimes, it is the bank or lender that requires GAP insurance as they want to be sure the loan is paid off by the insurance when a car is totaled or stolen.
For example, Mary gets in an accident. The insurance determines that her car is worth $10,000; however, Mary owes $15,000 on the vehicle. Thus, Mary is upside down (owes more on loan than the car is worth). If Mary does not have GAP insurance, then when the car is totaled, she will owe the bank $5,000 after the insurance pays the $10,000 to the bank. If Mary has GAP insurance, then the GAP insurance will pay the $5,000 so that Mary owes nothing.
If you put a large down payment on a car and or if you get a really good deal on the car, then possibly you would never be upside down if the car was totaled in the future. In that instance, you would not need GAP insurance.
If a bank or lender sees that you are buying a $10,000 car for $15,000, then it is going to require you to have GAP insurance as it realizes that if you drive off the lot and the car is totaled (or likely if it is totaled at any time before the loan is paid in full), then the car insurance won’t pay off the loan and the bank will solely have the remedy or suing the car owner for the loan deficiency.
More often than not, it is the bank or lender that will dictate whether GAP insurance is required.
