Auto Loan Lease Coverage (or "GAP Insurance"): What It Is & Why You May Need It

GAP Insurance, or Auto Loan Lease Coverage as it is technically named, is not an insurance policy at all.  Guaranteed Asset Protection or Guaranteed Auto Protection is actually a debt cancellation agreement.  This “protection”, which is most often sold to you when discussing the economic details of your purchase with an auto dealership’s Financial Manager, is designed to reduce the impact of the negative equity you have in a new vehicle, if you should be in a total loss collision shortly after purchase.

Since the typical auto insurance policy pays its policyholder for the Actual Cash Value of a total loss, you may be personally responsible to pay off a loan, for a vehicle you no longer have, after collecting your settlement money from the insurance carrier, without this protection.

One of the most confusing things about this protection is that it is sold under so many different names. Sometimes it is called GAP Insurance, then Guaranteed Asset Protection, Guaranteed Auto Protection, Loan/Lease Gap Coverage, Lease/Loan Gap, New Car Expanded Protection to name just a few versions.

Secondly an auto dealership will generally tell you that it is available only at the time of purchase. This is not at all true.  A policy can be purchased from an auto dealer, on-line or from an insurance agent or company.  It can be purchased up to a year after the vehicle is purchased.

How well regulated the contract is depends on who you purchase it from.  If a bank or credit union sells it, state insurance department regulations do not apply. The contracts purchased from an agent or insurance company are subject to insurance regulations and the attendant consumer protections.

1. Gap Insurance makes sense to consider if you are “upside down” on your auto loan. This can occur for a number of reasons;
2. Take out a loan with an extended term, so equity is built more slowly.
3. Borrow more than the purchase price of the vehicle on your loan.
4. Financing tax, license, registration, service plans and extended warranties on a loan, can put you in this position.
5. Put zero money or a small amount of money down.
6. Pay too much for your new car.
7. High depreciation.

There are some vehicles which lose 30% of their value within 3 months of purchase.

If you purchase Gap Insurance from an auto dealership you will be charged the full premium for the life of the loan. However the price can be negotiated.  Should your car become a total loss at a point in the loan when you no longer owe more than its value, then you are not going to collect anything under the protection, even if you are still paying the “premium” for coverage.  Furthermore some of the “premium” auto dealerships charge is actually an “administrative fee”.

A typical insurance company charges $20-30 every 6 months. An on-line vendor charges a one time fee of $399. An auto dealership charges $695-795 for the life of the loan. (These figures are only examples of prices discovered in the writing of this article and provided for comparative purposes.)

If you purchase from an on-line vendor, make sure you know to whom you are providing personal information or transmitting funds.

Some insurance companies sell GAP protection as a component of your auto insurance policy.  If you purchase GAP protection in this manner, remember to ask for its removal when you no longer owe more than your vehicle is worth.

If you lease a vehicle Gap Insurance is generally included in the lease as a requirement to protect the leasing company.  Be sure to check your contract so that you are not charged for coverage twice.  A second charge has been known to appear in the final figures on the lease agreement.

Sometimes Gap protection covers the deductible and other times it does not, so be sure you know which is the case, if you carry a high deductible on your auto insurance policy.

Typical exclusions on a GAP contract are;

• customer retained salvage
• unrepaired damages discovered when inspected
• towing
• rental charges
• storage fees
• late payment or interest charges
• credit insurance
• carry-over balances from previous loans or leases
• service agreements
• after market installed equipment
• penalties for excessive use of a leased vehicle

Some GAP contracts have a mandatory arbitration clause. If you have a dispute under one of these agreements you can not recover disputed funds in a lawsuit. How the value of a total loss is determined is sometimes written into the provisions of your GAP contract.  Once you sign the agreement you are bound by these provisions, as in the signing of any other legally binding contract. There have been contracts written that are subject to the laws of a foreign country or other state, so be sure to check the fine print.

GAP protection is available for purchase on motorcycles and for both used and refinanced vehicles.

There are at least eight states wherein you can not purchase GAP protection because it is not available for vehicles registered in those states.

In researching this article I asked one insurance salesman whether he had purchased GAP protection for a vehicle he had just bought.  He laughed very loudly and stated “With what I paid for the car I would make money if it were declared a total loss.” In his case the downturn in the economy eliminated the need for GAP protection.

Whatever your situation, ask around about GAP protection before you buy your new car. If you do decide you would like the protection, be sure to know all the provisions of what you are purchasing. This is one product which should have the warning label of “Let the Buyer Beware”.