Gap Coverage

Gap coverage, formally called Guaranteed Asset Protection, pays the difference between your vehicle's actual cash value at the time of a total loss and what you still owe on the auto loan or lease. Without gap, if your car is totaled and the insurance check is less than the remaining loan balance, you owe the difference out of pocket.

This gap is common in three situations. First, when you financed more than 80 percent of the purchase price (the value drops below the loan balance quickly due to depreciation). Second, when you rolled negative equity from a previous loan into the new one. Third, when you have a longer loan term (60 plus months) where depreciation outpaces principal reduction in the early years. A new car loses 20 to 30 percent of its value in the first year, faster than most loans amortize.

How it works in a total loss: your standard collision or comprehensive coverage pays the depreciated actual cash value of the vehicle. Gap coverage then pays whatever loan balance remains after that payment. The combined result is your loan is paid off and you do not owe anything out of pocket.

Where to buy gap: from your auto insurance carrier as an endorsement on the auto policy (usually 20 to 60 dollars per year), from the dealer or lender at the time of financing (usually a one-time charge of 500 to 1,000 dollars, sometimes negotiable), or from a third-party gap provider. Buying through the auto carrier is typically the cheapest path. Gap coverage from the dealer or lender is more expensive but is paid for as part of the loan.

Gap coverage is typically only needed during the period when the loan balance exceeds the vehicle's value. Once you have paid down enough principal that the actual cash value exceeds what you owe, you can drop gap.