Guaranteed Auto Protection (GAP) insurance is an optional auto insurance coverage that helps pay off your auto loan if your car is totaled or stolen. After you purchase or lease a new vehicle, it begins rapidly depreciating in value, often resulting in situations where the amount owed on an auto is greater than the cash value of that particular vehicle. GAP insurance works by covering the “gap” between what you owe on a car and the car’s cash value in the event that the car is totally lost. Here's an example of how it works:
- Say you finance $30,000 for a new car.
- After having the car for a while and making payments on your loan, you now owe $25,000 on your loan. Meanwhile, the car itself is now only worth $20,000.
- If at this time your car is stolen or totaled, there would be a gap of $5,000 between what your car is worth and what you still owe on your loan.
- With GAP insurance, your insurer would pay you $25,000 (minus your deductible) to cover the loss of your car and the remaining balance of your auto loan.
- Without GAP insurance, your insurance would only pay you $20,000 (minus your deductible) for the loss of your car, leaving you to pay the remaining $5,000 of your auto loan using your own finances.
Common GAP Insurance Issues
GAP insurance can be a good investment if you are buying or leasing a new car, but may not be worth it if you bought the vehicle used, or if it is several years old. Additionally, there are several exceptions that may affect the amount GAP pays. It is important that you read your policy to know these exceptions, but common ones include:
- Overdue loan payments and late fees.
- Damage from previous accidents.
- Allowing your insurance to lapse.
- Exceeding the declared mileage for your vehicle.
Additionally, GAP insurance does not provide coverage for vehicle repairs, mechanical breakdowns, or general wear-and-tear issues. If you are having issues regarding a GAP claim, it is important that you thoroughly review your policy and contact your policy provider.
Final Notes on GAP Insurance
It is important to note that GAP policies are entirely optional and cannot be required as a condition for receiving an auto loan or lease. Furthermore, Texas law states that the cost of GAP insurance cannot exceed 5% of the loan amount. Additionally, most GAP policies will allow you to drop them if/when your remaining loan amount is less than your car’s cash value. It is recommended you do this so you don't continue paying for a policy that no longer benefits you. Finally, when shopping for a GAP policy, it is important to look at what and who is offering the policy. Car dealerships, credit unions, and insurers can all offer GAP, or GAP-like policies, each with differing costs, exclusions, and appraisal processes.
Insurance companies don’t always make coverage clear. If you’re facing a GAP-related dispute, contact Paradowski Law at (855) 524-2976 or fill out our online form to schedule a consultation.