Anything can happen after your vehicle rolls off the showroom floor, which is why you rely on your auto insurance policy to cover those unexpected events. Guaranteed Auto Protection or GAP insurance adds an extra layer of financial security in case you get into an accident resulting in a total loss. However, you're probably wondering if you could do without it and save some money in the process.
Only If You're Leasing or Financing a New Vehicle
Imagine you're leasing or financing a brand-new vehicle and you get into an accident. Due to the effects of depreciation, your car's actual cash value (ACV) might be thousands of dollars lower than the amount you owe on its loan or the lease contract. If your insurance provider decides to pay out close to the vehicle's ACV, it means you could be responsible for the gap between what you owe and what your vehicle is worth to the insurance company.
GAP insurance is designed to take care of this difference and it's usually a must-have for lessees and those financing their new rides. In fact, nearly all lease contracts and many loan contracts stipulate the use of mandatory GAP insurance coverage whenever purchasing a new vehicle. This is mainly so that the auto lender or leasing company does not lose out on thousands of dollars after your insurance company pays out.
In other words, having GAP insurance coverage means you won't be stuck making monthly payments for a vehicle that's been totaled, stolen or otherwise made unavailable to you.
Opting Out of GAP Coverage
GAP insurance may be considered mandatory in most circumstances, but it's also possible to opt out of the coverage if you feel it's unnecessary. For instance, you can forego GAP coverage if your lease or loan comes with a GAP waiver. Whereas GAP insurance steps in to pay the difference between ACV and the remaining loan or lease amount, GAP waivers allow the leasing company or your lender to simply cancel or forgive the remaining amount entirely.
You can also opt out of the GAP coverage your leasing company or lender has lined up if you plan on selecting your own GAP provider. In some cases, searching for your own GAP coverage could turn out to be more affordable in the long run than relying on the provider your lender or leasing company has in mind. Choosing your own GAP coverage can help you save money on your insurance costs.
You might not need GAP insurance if the vehicle is several years old and well on its way towards the bottom of the depreciation curve or if the vehicle's ACV is much higher than the loan on the vehicle itself. In cases like these, the money spent on GAP coverage could be used to enhance your current auto insurance
Understanding the Drawbacks of Ditching GAP Coverage
Opting out of GAP insurance can have its advantages, but it also comes with a noticeable drawback. Getting into an auto accident could land you with negative equity on your auto loan if the ACV is significantly lower than original auto loan is worth. Being "upside down" on an auto loan or lease contract could cost you hundreds or even thousands more throughout the life of the lease or loan.
As auto expert Jim McGraw notes, negative equity may not have much effect on your credit score, but it can affect your purchasing power. This means you may not be able to find certain vehicles at ideal price points to replace your current vehicle or find a sensible APR rate for another vehicle the next time you go car shopping.
Having GAP insurance coverage can be beneficial, but there are also times when it's not needed. Understanding when to opt for or against GAP coverage can help you save money on your next vehicle purchase. Check out websites like http://www.unitedsecurityagency.com for more information.