GAP Insurance: Your Questions Answered

Insurance, warranties, vehicle protection plans, GAP insurance. Let’s be honest, it can be downright confusing to keep all of these products straight. While they are all meant to protect your property, they all work in different ways and protect you in different ways.

Let’s talk about GAP insurance, how it works and how you can decide if it’s worth it.

What is the purpose of GAP insurance?

Before we get into what GAP insurance is, let’s talk about all of the different vehicle protections you have and discuss what protects what.

Warranty

A warranty is provided by the car manufacturer and covers any problems that may occur to the car that are not your fault. There are two types of warranties, limited bumper to bumper warranties and limited powertrain warranties. Limited bumper-to-bumper warranties cover most things that can go wrong on your car, generally only excluding things like wear and tear and theft. Limited powertrain warranties cover the parts of your car that make the car drive, such as the drivetrain and the transmission. These typically last three to five years depending on the dealer.

Vehicle Protection Plan

A vehicle protection plan is an optional feature that can cover if something goes wrong on your car that is not your fault after your initial warranty expires. It is essentially an extended warranty. Coverage varies from policy to policy. Vehicle protection plans and warranties are designed to cover problems with your car that are not related to an accident.

Car Insurance

Car insurance on the other hand is designed specifically for accidents and external factors that affect your car. Car insurance protects you in two ways: it covers any damage that occurs to your car as a result of an accident and protects you financially if you are liable for someone else’s injuries or damages. Car insurance is required in all states except New Hampshire (but you are still financially responsible for any damages that are your fault, so you should really have it anyway).

There are different levels of insurance which all cover different things:

• Liability insurance is composed of three parts: bodily injury coverage per person, bodily injury coverage per accident, and property damage coverage per accident. This covers any damage you may cause to another driver, their passengers, or their property, including their car. Liability insurance is the minimum insurance requirement in most states. 
• Comprehensive insurance, which covers the cost of damages to your vehicle if there is a non-crash accident, such as weather damage or theft. This also covers damage that occurs if you hit an animal. 
• Collision insurance covers damages to your vehicle if you hit or are hit by another vehicle.

GAP Insurance

GAP insurance, or Guaranteed Asset Protection, is optional insurance that kicks in when there is a gap between what insurance will pay and what you still owe on the car.

Let’s say you owe $15,000 on your car when you get into an accident. Your car insurance decides that they will only pay out $12,000 in damages. This means that you are still responsible for $3,000 to the lender. GAP insurance would ensure that you do not have to pay this amount.

How quickly do cars depreciate?

GAP insurance protects you from depreciation. But just how fast do new cars depreciate? Well, pretty quickly actually. When looking at the rate of depreciation, we can divide it into three categories: after it leaves the lot, after one year, and after five years.

After it leaves the lot…

Your car loses value the second you drive your car off of the dealership’s lot. The car officially has an owner and is no longer a new car. It is estimated that a new car loses about 10% the moment it leaves the lot. Your car can go from $30,000 to $27,000 in a few seconds. 

After one year…

Your car will lose the most value in the first year you have it. Experts estimate that new cars lose 20% of their value in the first year. 

After five years…

After the initial depreciation of the first year, cars tend to lose about 15% of their value every year. By the end of the car’s first five years, it will lose about 60% of its original value. 

Depreciation occurs due to a number of factors, including:

• Mileage. High mileage shortens the amount of usable time left on the car and causes faster depreciation. 
• Age. The older a car is, the less it’s worth. 
• The Make and Model. Certain car’s depreciate at a faster rate simply due to supply and demand. Value is ultimately based on how much someone is willing to pay for it. If you have a less desirable car, expect your car to depreciate at a faster rate.
• Ownership History. Cars with fewer owners will depreciate more slowly than those with a lot of owners.
• Condition. If the car is in good condition and has not been in a lot of accidents, it will depreciate slower. If it has a pretty checkered past, it will deprecate at a higher rate. Regular oil changes, alignments, and general maintenance will slow deprecation. 
• Color. While this seems insignificant, the color of your car will actually dictate depreciation. Neutral colors depreciate slower than other colors, since neutral colors are always in style. 

Is getting gap insurance worth it?

GAP insurance is specifically designed for people who are financing, so it will not make sense for everyone to get it. But there are times when it is definitely worth it. Ask yourself the following questions to determine if GAP insurance is worth it. 

Did you put less than 20% as a down payment?

GAP insurance helps you when your car loan is underwater. This means that you owe more on your car than your car is worth. Your car is more likely to be underwater if you did not put a significant amount down. Depreciation occurs at different rates depending on your car, but your car starts depreciating the minute you drive off the lot. The more you put as a down payment, the less likely your car’s depreciation will outpace the car’s value.

Is your car a lease? 

Your car lease may specifically require GAP insurance, in addition to collision, comprehensive, and liability. Check the fine print to determine if it is necessary.

Does your car have a high depreciation rate?

As we mentioned above, different cars depreciate at different rates. Luxury cars tend to depreciate at the fastest rate, but every make seems to have a few models that suffer from depreciation more than others. Be sure to do your research to determine if your car will suffer. 

Do you drive a lot?

One of the biggest contributors to depreciation (that you can control) is how many miles you put on your car. If you drive a lot, your car will depreciate faster and will have a higher chance of ending up underwater.

Do you have a long repayment period?

The longer your repayment period is, the higher the chance is that your loan balance will outweigh your car’s value. Long repayment periods are great for your monthly budget (after all your monthly payments will be lower when you have a longer period to pay the loan off). But long repayment periods mean that you will pay more in interest over the life of the loan and your car will have a greater chance of becoming underwater. GAP insurance can help protect you from this.

Can you get gap insurance after you buy a car?

GAP insurance is not offered by car dealerships, so getting it after you purchase your car is not a big deal. You can get GAP insurance through most standard insurance companies, or you can get it from a third party.

If you are looking to refinance your car, Auto Approve works with you to make sure you get the best GAP coverage possible. Our loans come with GAP to protect you from negative equity. And the best news is that GAP insurance is incredibly affordable. Most customers can get GAP insurance for less than $14 a month. And considering how much money and hassle that can save you, it’s a real life saver (at an incredible price).

That’s everything you need to know about GAP insurance, and how you can decide if it’s right for you. 

If you are considering refinancing your car, it makes really good sense to bundle GAP insurance in with your new loan. It is easy, affordable, and can save you a lot of headaches in the future. No one wants to get stuck with a bill they can’t afford (and a car that’s totalled and still keeping you in debt). 

Auto Approve is here to help you refinance your car loan with ease. Our experts can help guide you through the refinancing process and make sure you get the best car loan possible. Add in GAP insurance and you are set.

So don’t wait any longer, contact Auto Approve today to get started!