What is GAP Insurance?

GAP insurance covers the difference between the book value of your vehicle and the amount that you financed to purchase it. If you are in an accident and your car is deemed to be a total loss, your insurance might only reimburse the book value of the car, leaving you liable to pay the difference.

A Pittsburgh personal injury attorney will tell you that the term “GAP” does not refer to that difference, but is instead an acronym for “Guaranteed Asset Protection,” which is a form of insurance.

It covers the entire remaining balance of the loan that you used to purchase the car– after standard insurance reimburses the book value.

We have the knowledge and experience in addressing GAP insurance issues and in analyzing some potentially less expensive alternatives.

The Value of Your Car Goes Down Faster than Your Car Loan Balance

New cars lose 20% to 30% of their value during the first year of ownership and lose 10% to 20% of their value each year after that. The average length of an auto loan is now five to six years.

Even at low-interest rates, the reduction in the loan principal will be less than the reduction in the value of the car. In fact, the loan balance and car value will not synch up until you make two or three years of payments.

If you do not have full replacement insurance for property damage and your vehicle is stolen or is totaled in a car accident, your auto insurer will only reimburse an amount equal to the car’s book value. This leaves you potentially liable to repay the full principal balance of your auto loan.

GAP insurance will reimburse you for this difference.

How to Determine if GAP Insurance Will Benefit You

Ask your lender for a full payment schedule for your auto loan that shows how the principal will go down as you make regular payments. Next, compare that schedule to the book value of your car with an assumption that you will lose 20% of that value each year.

That comparison will determine if GAP insurance will benefit you, at least during the first few years of the loan.

GAP insurance might benefit you if:

  • you made no down payment for the car or financed dealer add-ons that increased the cost of the car to anything near or over its sticker price;
  • you expect to drive the car more than 15,000 miles every year, or you will be driving it in harsh conditions (these situations cause the car to depreciate more quickly);
  • you purchased a car with below-average resale value.

Pennsylvania state laws require drivers to carry at least $5,000 in property damage in addition to liability coverage for bodily injury. State laws do not mandate GAP insurance, and in all cases, a driver will need to determine whether to purchase that insurance.

Shop Around for GAP Insurance

GAP Insurance is highly profitable for auto dealers. This does not mean that the dealer is taking advantage of the car buyer because, in many instances, the buyer derives a genuine benefit from GAP insurance.

Rather, an informed buyer may be able to negotiate a lower premium to purchase a GAP policy that the dealer might offer.

You should also talk to your insurance company before you finalize the financing for your new car. You might be able to add a GAP rider that costs less than the separate GAP policy that a dealer will sell to you.

If your insurer does not offer GAP coverage, you can likely find insurance companies that offer standalone GAP policies in your state.

Further, if you can, you should consider paying premiums for the GAP policy outside of the financing for your car. If you do include those premiums in the financing, they will increase the amount of interest that you pay as part of your car loan.

Managing Liability When You Do Not Have GAP Insurance

Your liability for the difference between your car’s value and the principal balance of a car loan is only one of several challenges that you might face if you have a serious car accident.

In Pennsylvania and other states that have “no-fault” insurance laws, your insurance will cover at least a portion of the value of your property losses, your medical bills, and your other costs and expenses.

A Pittsburgh car accident lawyer at our firm, can help you to find other sources to reimburse the full amount of your losses and damages, including losses that might otherwise be covered by GAP insurance.

Contact us at Chaffin Luhana today

We represent victims of car accidents to recover the largest available compensation for losses and damages— both from insurance companies and from the negligent parties that caused those accidents.

Please see our website or call us for a complimentary consultation with a Pittsburgh car accident attorney about how we can help you recover the full amount of your damages after a car accident, even if you do not have GAP insurance.