Understanding GAP Insurance and GAP Waivers

It’s easy to get lost in paperwork when you’re financing or refinancing your car. A product known as GAP, or Guaranteed Asset Protection, is one item you’ll often be asked to consider. You may be skeptical of add-ons like this, but GAP in particular can offer valuable protection that you’ll want to at least consider. Knowing your options for GAP insurance and GAP waivers is an important first step in understanding which, if either, is right for you.

What is a GAP waiver?

In the unfortunate event you totaled a car that you’re still making payments on, GAP comes into play. GAP waiver is an agreement made between you and your lender, usually attached to your loan contract, that waives your obligation to pay the difference between the value of the car and what the insurance covers in the event of a total loss of the car. First, your insurer will estimate how much your car was worth before it was totaled. This calculation is known in the industry as the actual cash value, or ACV.  

It’s important to know that your auto loan doesn’t disappear just because your car is totaled. Often, because your car has depreciated faster than you’ve paid down your loan, the insurance company’s payout won’t be enough to fully pay off your outstanding balance. In that case, you’re still on the hook to pay off the remainder of your loan on your own — unless you have GAP coverage. 

If you have GAP, your lender will waive any remaining balance on the loan after insurance pays. It’s like magic — poof, the rest of your loan is gone, and you can start looking for a new car without the burden of paying for a car you don’t have anymore. 

How do I get a GAP waiver?

Your dealer (or lender, if you’re refinancing) will usually offer you the option to add the GAP waiver fee to your monthly payment when you’re in the process of taking out a loan for your car. The cost varies depending on the source, but it will be rolled into your loan for you to pay off over time.

What is GAP insurance and what does it cover?

GAP insurance is an optional coverage that helps to pay off your car loan in the unfortunate event that your car is totaled or stolen. You can purchase this insurance from another third party, like an insurance company. Financing options may be available, but most people who choose this option pay for GAP in full upfront.

This has a few advantages: first, you may save money if you pay upfront. And second, you can get GAP insurance later if you decide you want this kind of protection.

How do I get GAP insurance?

When you’re buying or leasing a new car, your dealer or auto insurance company can offer you GAP insurance. This is usually optional if you’re financing a car purchase, but it might not be optional if you’re leasing a car. 

As long as your car loan or lease hasn’t been paid off, you can buy GAP coverage to an existing car insurance policy. Some insurance companies may only offer a limited amount of time to purchase coverage. Purchasing GAP insurance from an insurance company may be less expensive — in addition, you may not need to pay interest on your coverage. An important thing to note is that you may need collision coverage or comprehensive coverage to add GAP coverage to a car insurance policy, this is typically used in conjunction with GAP insurance. You have the option to cancel once it’s no longer beneficial. If there’s no longer a “gap” between your car’s cash value and the balance you owe, it doesn’t make sense to keep the insurance.

Should I get GAP?

Whether you choose to purchase GAP comes down to your risk tolerance and the amount of cash you have on hand to pay off part of your loan if you total your car. 

The benefits you gain from GAP go down over time until eventually, coverage no longer makes sense.. That’s because a car tends to depreciate rapidly right after you buy it. This is also why a GAP waiver is most common during the first couple of months (or years) you’re paying off your loan. As you start to pay down your loan balance, the gap between that balance and the amount insurance will pay (in the event of a total loss) gets smaller. Eventually, your car will be worth more in the eyes of your insurance company than what you owe on it.

Consider these scenarios in which GAP may make sense:

• You’re refinancing when your loan-to-value ratio is still high: You’re probably aiming to cut costs when you refinance, but you don’t necessarily want to axe products that keep you protected — especially if you’re refinancing shortly after taking out the initial loan. Your loan value may still be much higher than your vehicle’s value in this case, likely meaning you’ll have more to pay out-of-pocket if you total your car. 
• You don’t have enough cash savings: If you can’t afford to pay for any shortage between your loan balance and vehicle value with cash from emergency savings, a GAP product can give you peace of mind. 

• You didn’t make a down payment: This puts you at greater risk of having to pay for a gap because it’ll take longer for you to break even on your loan.

• You’re taking out a long-term loan: It takes longer for you to break even on your loan when you’re paying it off over a long period of time, putting you more at risk. 

• You’re leasing a car: Many lease agreements already include a GAP waiver, without giving you the option to opt out. 

If you’ve got plenty of emergency savings and can tolerate some risk, you probably won’t benefit from GAP. And if you’re lucky enough to owe less on your car than the car is worth, you definitely won’t benefit from it. But if not, it’s a wise option to consider. 

Car refinance loans not available in IA, MD, NV, or WV. Car refinance loans in IL and MO are originated by Cross River Bank or Midwest BankCentre. Car refinance loans in CO, KS, and TX are originated by Cross River Bank or Rising Bank, Member FDIC. Car refinance loans in FL, GA, and AL are originated by Cross River Bank or Drummond Bank, Member FDIC. All other car refinance loans are originated by Cross River Bank, Member FDIC.