As a vehicle owner, you need to realize that what you currently owe the dealership and its actual market value, taking into account its depreciation with each passing day, are not going to be equal. It’s a reality that you have to accept.
You’re in good hands when you have insurance that particularly covers this gap in value when your car gets stolen or totally wrecked after an accident (knock on wood). But how much does GAP insurance cost?
The Average Cost of a GAP Insurance
The average GAP insurance cost ranges from $5 to $15 per month as an add-on to the comprehensive or collision insurance from your provider. This can be translated to around $400 to $900 as a one-time charge to be added to the car loan with terms of 60 to 72 months.
For example, an owner of a 2020 Honda Civic EX Sedan valued at $23,000 with a $3,200 down payment at 1.9% APR is being charged $10 per month for GAP insurance.
However, some can even charge as much as $40 per month, depending on several factors. The GAP insurance rate is approximately 5% to 6% of the collision and comprehensive insurance coverage that you have set for your car.
Let’s say that your annual premium is $1,400 and the coverage for collision and comprehensive is around $420 to $560. So taking 5% to 6% of the coverage gives $21 to $34 for the price of GAP insurance. As your car ages, the GAP cost decreases along with the collision and comprehensive costs.
Factors Affecting the Cost of GAP Insurance
Just like any other insurance policy, different factors affect GAP insurance fees. Some of these are the following:
- Vehicle’s actual value – the higher the car’s value, the higher the perceived gap because, typically, these cars tend to depreciate faster.
- Loan term – the longer the loan term is, the slower you build equity in your car, which widens the gap between your loan balance and the actual value of the vehicle.
- Down payment – how much you pay for the down payment will greatly affect the amount to be amortized within the loan term plus the annual percentage rate (APR).
- Location – besides the factors of cost of living and cost of doing business, pricing factors based on location include the likelihood that claims may arise. This includes the weather, crime rates, accident rates, road laws and regulations, etc.
- History of claims – auto insurance would most likely check your car’s model to see its record of past claims, if it is prone to repairs and overhauls, how enticing it is to thefts based on data, etc.
- Insurance provider – To save on cost, go to the lower end of the cost spectrum by going to insurance companies outside your dealerships for coverage.
What Exactly Is GAP Insurance?
GAP actually stands for Guaranteed Auto Protection. It is a type of car insurance that covers the difference between the money you owe on your auto loan and the compensation that your insurance company will pay based on your vehicle’s current value in the event of theft or a total wreck.
It particularly happens when the car’s retail price is higher than its resale value, and you are unable to recover the extra car loan costs. These typically include registration fees, sales taxes, and title fees.
GAP insurance was first established by the financial industry in North America. However, it’s not really a common policy in other countries.
This is primarily because people either pay in full or installment when purchasing a car.
Should You Have GAP Insurance?
As mentioned, GAP insurance is not for everyone, unless, of course, you want to spend money for nothing. However, in order to sort of maximize its benefits for your new vehicle, you must meet the following conditions:
- Your auto loan term is at least five years.
- You only pay a low down payment, typically less than 20%.
- Your loan has a high interest rate where your balance won’t be able to keep up with the depreciation of the vehicle.
- The equity from your previous auto loan has rolled negatively into a new loan.
- You have driven your car over 15,000 miles per year on average.
- You have bought a car that has a record of high depreciation rates.
What GAP Insurance Can and Can’t Cover?
GAP insurance is not some ordinary vehicle insurance that you can just choose to include in your vehicle insurance portfolio. Some of the common situations below can determine what GAP covers and what it cannot.
- Theft – if your car gets stolen, naturally, the vehicle insurance will cover your car’s value. The difference between that and what you owe the dealership or financing company will be paid by the GAP insurance.
- Total wreck – if your vehicle has been involved in an accident rendering it totally destroyed and unable to be fixed, GAP insurance will take over to cover the difference.
- Partial Damage: Unfortunately, if your car is not totaled, this cannot be covered by GAP insurance.
- Deductibles – GAP insurance is not to be construed to be responsible for covering your deductibles from your comprehensive or collision insurance.
- Injury or death – GAP insurance only covers vehicles that have been totally wrecked. It has nothing to do with the people figuring in the accident where the vehicle was destroyed.
Points to Remember Before Buying a GAP Insurance
- Make sure that you really need to have GAP insurance. You already know the conditions, so if you have paid your car in full or acquired it through a very short-term installment or loan, there is no need for GAP insurance.
- As much as possible, check your auto insurance policy to see if it covers GAP insurance. If the GAP is included, then, you don’t have to purchase one.
- Find out if you can cancel the GAP insurance whenever you feel like there is no need to have one.