Explanation of What Gap Insurance is For Auto Loans

When you go to close on your auto loan one of the optional products that your loan officer may offer to you is GAP insurance. Sometimes called “Guaranteed Asset Protection” or “Debt Cancellation Agreement” GAP insurance can be added to your loan to help offset any future liability in the event of a total loss of your vehicle. Here is a general outline of how it works.

1) WHAT IT IS- Simply put. In the event of a total loss, GAP insurance pays off any deficiency, if there is one between what your insurance companies settlement amount is and the balance you still owe on your loan.

2) WHAT IT DOES- If your vehicle is totaled out by your insurance company they will use a variety of resources to determine a current market value of your vehicle at the time of the loss. Many times this settlement amount will be less than your outstanding loan balance. How much you owe at the time of the loss is irrelevant to your insurance company. They are only going to pay out what their interpretation of the current market value is. If the proceeds from your insurance company are less than what you owe then your GAP insurance policy would kick in and satisfy the difference, paying off the rest of your outstanding loan.

3) DO I NEED IT- Many factors determine whether or not you will have a deficiency owed in the event of a total loss. Your interest rate on the loan has a lot to do with how quickly your principal balance is paid down. If your rate is high, less of your monthly payment is going towards paying down the principal on your loan. How much money you put down is also a factor. If you put a substantial down payment towards your loan then obviously your loan amount will be much less therefore reducing your risk of having a deficiency balance due in the event of a total loss. How long of a term you finance the vehicle for plays a role also. If you finance a vehicle for three years you will have the loan paid sooner than if you finance the vehicle for five years. Consider all of these factors before you make a decision. If you find yourself financing the vehicle for a longer term and putting minimal down then it is recommended that you purchase GAP insurance.

4) WHAT DOES IT COST- Although every insurance company is different, the price of GAP coverage can range from $250.00 all the way up to $700.00. Sometimes the amount you are financing can affect the price. This will usually affect your payment $10.00 to $20.00 per month if you add it to your loan depending on the particular premium amount. Many automotive insurance companies offer this coverage as a rider on your existing auto insurance policy at cheaper premiums so it is recommended that you check with your insurance agent also.

It is important to note that GAP insurance is completely optional and not a requirement to get approved for a loan. It is simply a way for you to protect yourself from the depreciation that happens with automobiles. If the worst does happen this coverage will at least get you out of your existing loan rather than leave you with a balance owed and still no vehicle.

Author: Scott Stanko
Source: ezinearticles.com