How does GAP coverage work?

GAP coverage (aka Guaranteed Asset Protection) is optional insurance coverage that pays the difference between what is owed and what a vehicle is worth in the event the automobile is stolen or destroyed. This coverage is included in the terms of a Chrysler Capital lease contract and optional in terms of financing a vehicle purchase.

So how does it work? Well, here’s a nightmare scenario for not choosing GAP coverage.

A fictitious consumer we’ll call John purchased a new car about a year ago, say, for $22,757 – the Kelley Blue Book Fair Purchase Price of one small sedan in a suburb of a major Southwest city.

In this example, John decided not to purchase GAP coverage, often referred to as “gap insurance,” even though it was offered at the dealership and by his insurer. And, then, it happens: The car is declared a total loss after an accident, a natural disaster, vandalism or theft.

John’s auto insurance company says the value of the year-old vehicle is about $13,000 because of depreciation. Unfortunately, despite a 10 percent down payment, he still owes the lender almost $17,000 on the vehicle. In this example, that means there’s about a $4,000 gap that John will now have to pay out of pocket.

(John still would be “upside down” if the car was a total loss after two years, owing about $2,500 more than it’s worth. Only at three years, in this example, does his regular insurance nearly cover the loss.)

Here’s where GAP, or gap, coverage can come into play.

It could possibly make up the difference between John’s ordinary collision insurance and the amount owed if the vehicle is totaled*, when he still must continue to make regular on-time payments for a vehicle that no longer can be driven and that he will need to replace.

Here are some of the reasons that GAP coverage may be appropriate for a consumer to consider, according to Edmunds.com and bankrate.com:

Consumer makes little or no down payment

A consumer finances a vehicle and makes little or no down payment, which means he/she will be way upside down the moment the vehicle is driven off the dealership lot.

 Long-term loan

A consumer takes out a vehicle loan with a long term, meaning 60 months or more.

Upside-down trade in

An owner trades in an upside-down car and adds the amount still owed to a new car loan.

Quick depreciation

The vehicle depreciates faster than average and doesn’t have great resale value.

Owner drives a lot of miles

The consumer expects to pile the miles on quickly, more than 15,000 annually.

Additionally, making a larger down payment – say 20 percent – could also have a dramatic effect on the gap.

In our example scenario, John would owe about $15,000 on the vehicle worth $13,000 after the first year – a gap now of about $2,000. After two years, the gap would be about $1,000 with breakeven point early in the third year of ownership.

Ultimately, whether John purchases GAP coverage has a lot to do with his risk tolerance and how much he could afford to pay out of pocket to cover a gap if the vehicle is a total loss.

Car buyers should be careful not to go over the edge and fall into a financial gap.

 

 

*GAP coverage may not pay off the difference between the customer primary insurance settlement and the account balance at time of total loss. Refer to your contract and/or contact your insurance provider.

These statements are informational suggestions only and should not be construed as legal, accounting or professional advice, nor are they intended as a substitute for legal or professional guidance.

Chrysler Capital is not a credit counseling service and makes no representations about the responsible use of or restoration of consumer credit.