When you finance your new or used car or truck, you will probably be asked if you want to purchase GAP Insurance. While you may be hesitant to spend more money, this coverage could prove a smart choice in the event of a car accident. Our Q&As below will help you understand GAP and if it’s the right choice for you.
Q: What is GAP Insurance?
GAP Insurance is designed to protect your wallet in the event of a car accident resulting in a covered total loss of your car or truck.
Should such an event occur, your insurance company will provide their estimate of how much your car was worth at the time of the accident. This money is then applied to the balance of your auto loan or lease. All too often, the estimate is less than what you still owe on your car. This results in a “GAP” that you need to pay for out of your pocket – unless you have GAP Insurance. Take a look at this example:
Estimate of Car’s Worth: $11,500
Amount You Still Owe: $14,375
The “GAP”: $2,875
Unless you have GAP Insurance, you are obligated to pay that $2,875 to settle your auto loan balance.
Q: How much does GAP Insurance cost?
Adding GAP Insurance to your loan at MHV costs $225*, and this amount can be paid up front or financed with the loan. While $225 may seem like a lot, keep in mind that the amount you may have to pay in the event of a covered total loss of your vehicle could potentially be a great deal more. If your auto loan is a 48-month loan, for example, you’ll be adding only about $4.70 a month to your payment.
Q: When should I get GAP Insurance?
GAP Insurance is a smart choice if:
Q: How do I add GAP?
- The car or truck you’re buying is new or slightly used.
- You don’t have a significant savings that would allow you to cover the value of your car if a total loss accident occurs
- The auto you’re buying is high-value.
- You do not have a large down payment.
You can add GAP Insurance to your auto loan at MHV when you apply for the loan, when you close on your loan or within 1 year of the loan closing. After that time period, you may elect to add GAP Insurance, but you would be required to apply to refinance the auto loan.
Q: What isn’t covered?
It’s important to understand what GAP does not
cover, too. GAP Insurance will not cover:
Q: How is a GAP Insurance claim calculated?
- Your deductible
- Late fees or payments that haven’t been met on the date of the accident
- Prior charges (if, for example, you have insurance placed by your financial institution)
- Prior damage
If you file a claim for GAP Insurance, they will look at your amortization schedule – in other words, how much you should currently owe on your loan, based on when you financed it and how much your monthly payments are – and calculate what the current balance of the loan should be. Let’s look at an example:
- Your original loan is $25,000.
- You financed your loan 18 months ago.
- Your monthly payment is $300.
If you file a GAP Insurance claim, they will calculate your current loan balance to be $19,600 (the original balance, minus 18 payments of $300) and will base your payout on that amount. If you missed a payment and actually owe $19,900, you will be responsible for that additional $300 as well as any late charges.
Q: What do I do if I’m in an accident?
If you are in an accident and your vehicle is deemed a complete loss, you should continue to make your loan payment as scheduled until you hear a decision on your GAP Insurance claim. Doing so will prevent your loan from going into a late or delinquent status.
Q: How do I file a GAP claim?
Typically, a GAP Insurance claim will be filed on your behalf by your financial institution. Once your financial institution receives the claim check from your auto insurance company, they will then file the GAP Insurance claim. Check with your financial institution to confirm their procedure.
When financing your vehicle, be sure to consider the option of adding GAP Insurance. You may in fact have years of accident-free enjoyment, but having a safety net in the event of a total loss could bring welcomed peace of mind.
*as of September 2018