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How GAP Insurance Works

Guaranteed Auto Protection (GAP) insurance is a coverage plan that is designed to ensure you are not left with any outstanding debt if you buy a brand new car with a loan deal and the car gets totaled in an accident or stolen. This insurance covers the gap between the value of your car according to your insurer and the due payment on your loan deal. This 'gap' is also described as negative equity.

GAP insurance cannot be looked on as a replacement for normal motor insurance. Both insurance plans are designed to work hand-in-hand to fully protect your investment in an automobile. GAP insurance is only applicable if a car is stolen or totaled. Usually, if a car is stolen, your GAP insurance provider will allow some time for investigators to try to find the car before they make a payout. If your car is repossessed or involved in an accident and requires repairs, you cannot call on your GAP insurance provider. Also, GAP insurance does not cover damage to property and physical harm as a result of an accident. This claim is restricted to only cars that have been written off. GAP insurance does not usually cover deductible costs so be sure to ask your broker if it is included in your coverage.


Since the value of new cars depreciates quickly, in a short time, you could find that your car is worth less than you owe on your loan deal. Car owners are rarely able to pay off their loan before the value of their car depreciates substantially. For example, if you purchased a new vehicle now and you are involved in an accident which completely destroys the vehicle beyond repair after one year. Your insurance payout would be based on the value of the car at the time of the accident. Therefore, if you were to receive a payout from your motor insurer for any reason, you would still need more money to completely pay off your loan. Else, you would find yourself paying off for a car that is no longer on the road. If you have GAP insurance, it will cover the difference.


GAP insurance does not only cover new cars but also leased cars. An insurance payout for a leased car would be based on the value of the car. Just like new cars, leased cars are also likely to depreciate in value over a period of time. If your car lender sends you a bill for more than what your insurance covers, then your GAP insurance will help to cover the difference. For leased cars, GAP insurance is only necessary if you are leasing the car for a long time. Also, it is only worth it if the car is expensive.


You can purchase GAP insurance from your car dealer, your motor insurance provider or from a licensed broker. Of all three options, buying a GAP insurance plan from a car dealer is least recommended because you may end up paying more.


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