What if there was a way to have peace of mind and a security blanket in the event of a total loss of your vehicle? There is.
You might think that if you have full coverage on the car you buy, you will get paid enough to cover your loan in the event the car is totaled or stolen. However, that’s often not the case. In fact, for many people, there’s a gap between the coverage on the car and the amount you still owe on your car loan.
A GAP Waiver is additional coverage you apply to your new or refinanced auto loan that protects you from potential financial catastrophe if something happens to your car — like theft or a total loss due to an accident.
In a case like this, your primary insurance company may cover the value of the vehicle less a deductible, which will leave you to pay off the outstanding balance on the loan. Not a fun place to be.
Without GAP, you may be faced with the burden of paying off a loan on a vehicle that you are no longer able to drive.
In the case of a car, insurance companies usually define the value in terms of the market value you might be able to get if you sold the car “as is” at the time of the accident or other loss. This is usually based on some third-party valuation tool, such as the “Blue Book” value of the car.
Unfortunately, cars can depreciate relatively quickly. “Depreciation” is the financial term for when an asset loses value, often for market reasons independent of the condition of the car. For example, if you buy a new car off a lot, the value of that car immediately drops below those left on the lot. Even if you don’t drive your car very much, its value drops rapidly compared to those still sitting on the lot. Objectively, your car should potentially be worth more than those on the lot. After all, having gone through the “wearing in” period, you’ve reduced the chance that your car is a “lemon” – and that determination should increase the value. But from a market perspective, the lot cars are still more valuable than the car you own.
At the same time, if you’ve only been paying a small amount on the car loan, with much of the payment going toward interest, the loan amount hasn’t decreased very much. This creates the gap between what your insurance company thinks your car is worth and the amount you owe on the car.
The short answer is “yes,” a GAP waiver is usually worth it. In most instances, it’s worthwhile from a financial standpoint. But even when it’s not, it’s often worth the peace of mind that comes from knowing you’re really covered in the event of a car accident or theft, and you won’t have thousands of dollars to pay on your old loan just when you’re looking for a new vehicle.
If you are looking at the math on GAP coverage, there are some clear conditions under which GAP coverage makes financial sense. From this perspective, you want a GAP waiver when you:
In these cases, a GAP Waiver will pay for itself.
On the other hand, a GAP waiver is an affordable way to get peace of mind about your car loan. You should consider it if you:
In these cases, a GAP waiver can help you rest easy knowing that you won’t be in a terrible situation if you lose your car to an accident or theft. It’s a bargain at the price, which could be as little as 45 cents a day, or about $14 a month.