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Don't get caught in the GAP- a buyers guide to GAP insurance for your auto

Updated on May 8, 2009

 GAP insurance is relatively new to the industry.  I tried to find an article to reference and agree with but it just seems so simple it's hardly worth using some other wise mans words.  Here's the deal:

When you take out an auto note, say $23,000...  If the vehicle is ever totaled (Total loss by insurance companies can include acts of god, stolen vehicle, fall asleep at the wheel, etc..) the insurance company only pays "Fair Market Value" for your vehicle.  They don't base this on what you owe.  Technically they base it on different things according to the insurance company you use, but the point is that they set the values, they ultimately hold the cards.  If they decide the value is $5,000 less than what you owe..  Tough.  You owe the bank the difference, and they don't usually like taking payments.  Plus you still owe your deductible.  So you are stuck with the debt.  Even if they do accept the rest in payments, you are only then making payments on a car that you no longer own!

That's where the optional GAP insurance would step in.  It will cover up to a certain percentage over and above what the NADA value is, plus most will offer to cover a portion or all of your deductible.  Some even offer you cash back for a downpayment on your next vehicle.

The overall point I have seen after years of practice is that Gap sells for mere dollars added to your payment (dependant upon rate, term, etc) and CAN BE a very valuable asset.  An insurance that you hope and pray you never have to use (who wants to total their car?) but an insurance that is well worth the buy, in the right situation.

That being said, as I usually advise:  Each individual deal is different, and so is each GAP company..  GAP, being a type of insurance, is bought by the dealer and sold to the customer with the loan.  Some banks even offer it through the dealer to help protect themselves from leftover balances.  Each GAP policy is worded specifically (some cover higher percenteages of value than others, some offer extra "perks" like cash back to you for your next loan, etc..) but the overall point is that you do need to understand what type of GAP you are purchasing.

For instance (and it's taboo to mention to customers in my business) apparently there are insurance companies that have caught on to this burgeoning market of GAP insurance, and they actually offer it on their policy for an added charge.  To be quite frank I only attempted to find out more about their specific coverage once and was met with a resounding "I don't have to tell you about my policies" answer from the otherwise kind insurance agent.  So I don't know how their GAP compares to mine, but I will say this:

GAP is designed to protect you and the Bank from the insurance company leaving you the two of you to bicker about a deficiant balance.  You can't totally blame the Insurance company, but do you really want them holding ALL the cards?  Better to have an separate insurance company protecting you for around the same price. Or at least better to consider it before hand. 

 Just like with Warranties, GAP is not the right insurance for everyone (for instance if you are only borrowing half the value of the vehicle due to trade in or down payment) and you may not need it, but better to understand it going in.  My own research would indicate that most "common folk" that owe money on their cars currently owe more than they are worth.  Besides, one thing none of us can guess on is the market.

You'll notice that in most of my articles I say things like "In certain situations" or "CAN BE", "MAY BE" and so on...  The reason I do this is because no two "car deals" are alike.  After all, it isn't just a "car Deal" to you, it's your home away from home for the next 3-8 years, your safety cage from the outside world, your second closet, your quiet space...  OH, and 10-40% of your income for the next X years!  That has to be first and foremost when considering all the many facets of an auto purchase.  I always advise first and foremost to:

"Find a car you like at a price you can afford from a dealer you trust"..  Sound familiar?

Illustration of where and when the GAP occurs

Notice the rate and term aren't extravagant, but if your rate is higher then the GAP stays longer...
Notice the rate and term aren't extravagant, but if your rate is higher then the GAP stays longer...


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    • profile image

      National Auto Guardian 

      8 years ago

      Great information. Because vehicles are such an investment, you want to be sure that you are protect no matter what comes along. I haven't yet had to put a GAP policy to use, but it is good to know that it is there, if anything should happen.

    • Fishin' Cricket profile imageAUTHOR

      Fishin' Cricket 

      9 years ago from The Ozarks Hills and Hollers of MIssouri


      that is very unfortunate, I wish I had some kind of magic bandaid of advice to fix this for you, but I am afraid that I don't.

      If the loan company is expecting the money "right now", then I am afraid you have heard your option for repayment. Whatever you do keep in contact with your lending institution. They will always try and work with you if you don't stonewall them. Also remember that they are speaking to thousands of people a month just like you. Some are honest people who are in dire straits, some are deadbeats who would renig on the loan even if they had the money. Keep this in mind when discussing this problem with them, they do this every day and probably don't take this issue as seriously as you do.

      Much will depend upon your banks willingness to A) work with you on the existing debt and B) give you a loan against another vehicle while keeping your loan amounts in value vs. the value of the vehicle. This will all depend upon many factors between you, the bank, and the next auto you pick out. I don't know your particular situation, but I feel I should mention that all banks see things differently, so if this bank isn't willing to work with you, try another.. But don't litter your applications across town. Two or three banks competing for your business should be plenty..

      Either way there is no one that is going to cover up the debt for you, and no way to fix this other than to pay for it and protect your investment better next time..

      The problem, as I see it, is that you may have to budge on your budget/want list to carry the extra $5k. Used cars won't work for covering your deficient balance, so it will have to be new. (feel free to ask for further explanation if that last sentence didn't make sense to you) Then if you do find a car that fits the loan amount and fits the budget, their may not be enough value left over to cover the options you need (Like GAP insurance).

      Whatever you do, just make sure you don't get yourself back in the same situation again. My best advice is always:

      Find a dealer you can trust, they will provide you with the products and services that you need at a price you can afford. If they can't do it, you are probably stuck. Anyone that tries to tell you otherwise has a motive.

      Take your time.. Again, I don't know your situation, but I will say that riding a $200 bike to work for a month while you figure out a solution is sometimes better than paying out the nose for a vehicle that you don't like, simply because it fits the budget.

      Good luck.... Thanks for the comment.

    • profile image


      9 years ago

      Didn't have gap insurance and my vehicle was a total loss according to the insurance company. This left me with a 5,000 debt that the loan company is expecting right now. What are my options regarding repayment, or getting a new vehicle with pre-existing debt.?

    • k@ri profile image

      Kari Poulsen 

      9 years ago from Ohio

      Thanks for the information. It is very useful.

    • Fishin' Cricket profile imageAUTHOR

      Fishin' Cricket 

      9 years ago from The Ozarks Hills and Hollers of MIssouri

      Thank you for the comment, GM.. I have found that, in a situation where your newly bought auto is totalled, having ANY value addition to help with your payoff is better than NONE. I don't think it's a coverage that's worth $1,000, but it is definitely worth something...

      Also I will point out that there is a possibility that the F&I manager was pushing the coverage so hard, not because it was worthless to you, but because he/she recognized that you truly needed the coverage.. It's possible...

      Either way, thanks for the comment...

    • GeneriqueMedia profile image


      9 years ago from Earth

      Thanks for this informative article.

      I didn't get the GAP insurance either partly because like you said--it only pays 'fair market value.' And also, being that I used to work at Circuit City, I knew the harder you sold something like this the more worthless it was. ;)


    • ripplemaker profile image

      Michelle Simtoco 

      9 years ago from Cebu, Philippines

      Hi Fishin Cricket, this GAP thing is new to me. I don't think we have this in our country. Or if ever we do, I'm completely in the dark about it. Hmmm..I don't know if I can push myself to research about that. Hahahaha

      There is a lot of good feedback from the comments posted above. And so I just want to congratulate you... This Hub is a HUBNUGGET nominee! Say that again, a Hubnugget nominee! See for yourself...

      Vote, vote and vote! Join the hubnugget fun. :-) Enjoy...

    • Jen's Solitude profile image

      Jen's Solitude 

      9 years ago from Delaware

      Another great hub, thanks for the info and your willingness to share your expertise in such an easy to understand way.

    • Ashley Joy profile image

      Ashley Joy 

      9 years ago

      This is something that so many people do not stop to think about when they finance that new car. The depreciation happens so fast and some have to pay such high interest rates an accident can really leave them in a bind. I did have a friend who had this experience and getting another car while still owing for one that no longer existed was hard on them.

    • Fishin' Cricket profile imageAUTHOR

      Fishin' Cricket 

      9 years ago from The Ozarks Hills and Hollers of MIssouri

      There's no homework like personal experience, eh? I have seen people get $7,000 in deficient balance covered, plus deductible, plus a cool $1,000 for a downpayment on their next vehicle.. And I have also seen people that have fought with the GAP company for months, making payments on a totalled car the entire time, only to get the excuse that "Your situation isn't covered, as per the fine print".. I hope everyone gets this message, and I honestly hope that one day GAP is a coverage that I don't have to offer.. But first I have to stop depreciation of autos and teach everyone how to buy smart..

      It's a daunting task, but I think (with the help of all you fine people) that I can do it... LOL

      Thanks for the comment..

    • Mighty Mom profile image

      Susan Reid 

      9 years ago from Where Left is Right, CA

      Hi Fishkin. This is quite a wakeup call! Thanks for doing your homework and sharing it with us here. Insurance is one of those necessary evils in life. But better to have it when you need it than not, eh?

      Cheers, MM

    • agvulpes profile image


      9 years ago from Australia

      We do have what is called compulsary third party insurance which is paid with your registration fees every year. That covers injuries in accidents and is no blame and is run by the Government.

      I forgot that we do have another optional insurance. I think it is called 'comprehensive third party' and only covers damages to other peoples property, not just cars, but not your own. It is much cheaper cover and worth having if your own car is a bomb.

      As far as values go we have a 'green book' bible which is available to insurance and dealers companies with different levels of values.

      You can also negotiate with the insurance company to come up with an agreed value for 'one off ' special vehicles.

      It is also against the law here to drive without at least 3rd party insurance but if you havn't got that you are also not registered. The way the economy is at the moment there is an increasing number of people driving unregistered vehicles.


    • Fishin' Cricket profile imageAUTHOR

      Fishin' Cricket 

      9 years ago from The Ozarks Hills and Hollers of MIssouri

      Not compulsory? Wow.. they just allow you folks to be responsible for yourselves, eh?

      In the state of Missouri it is against the law to operate a motor vehicle that is not insured with a minimum of x amount of liability insurance coverage.

      How do you, in OZ, come up with "Market Value" and "Agreed Value"?

    • agvulpes profile image


      9 years ago from Australia

      G'day fishin'. I don't think we have Gap here in OZ. But we have two no wait three choices for insurance. 1. Market Value (yeah right) 2. Agreed Value (more expensive) and 3. No insurance, it is not compulsary to have comprehensive car insurance.

    • RGraf profile image

      Rebecca Graf 

      9 years ago from Wisconsin

      We bought GAP with our very first brand-new car. We did so because we had totalled another car and had to pay the difference. We think it is important only because we've totalled another car due to hail damage (thank goodness we paid it off two years early) and almost totalled another one because we live in the Northwoods and you will have a car accident on the ice or with a deer eventually. It is something that each person needs to examine and weigh against their chances of needing it. Talk to others who live in your community and your insurance rep. They will know the odds on where you live.

    • Froggy213 profile image

      Greg Boudonck 

      9 years ago from Returned to an Isla Del Sol - Puerto Rico Will Rise Strong

      i just stumbled this great advice--good article Cricket!

    • JamaGenee profile image

      Joanna McKenna 

      9 years ago from Central Oklahoma

      It always cracks me up that your new car's value drops like a rock the minute you drive it off the lot. Years ago, a co-worker had the nightmare of all nightmares. As she was turning on to the highway from the dealership, she was hit by a drunk driver. She wasn't injured, thank heavens, but she didn't have GAP and ended up owing several thousand $$ on a car she'd only driven *maybe* a 100 yards. She didn't get GAP because the policy offered required an up front payment of the first year's premium, which I'd imagine was illegal as all get out since she had a good driving record and good credit.

    • Team Wiseman profile image

      Team Wiseman 

      9 years ago

      This is a really informative article. You make it very easy to understand, even if the person is illiterate in the topic. We believe people will definitely benefit from this article. Thanks for the hub. Team Wiseman


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