If you have car insurance without GAP (Guaranteed Asset Protection), a wrecked vehicle could wreck your finances.
You don't expect your car to be totaled by an accident or stolen---but you get car insurance just in case.
You probably don't expect that your insurance settlement could suddenly leave you thousands of dollars in debt, because you owe more on your car loan than your car is worth. You'll be glad to know there is a way to make sure a car wreck doesn't wreck your finances: GAP, or Guaranteed Asset Protection for your vehicle loans.
If your vehicle is totaled, you could end up owing more on your loan than your vehicle is worth. This is known as being "upside down" on your loan. As vehicles become more expensive and people take out more loans for longer periods of time, their risk of being "upside down" has increased. Americans have signed up for a record amount of vehicle loan debt for a record length of time. Almost one out of every four car buyers took out a 6 to 7 year loan---which has extended their risk of being upside down to around five and half years.
The reason for this problem is that most car insurance companies will reimburse you only for "fair market value." Fair market value is the common resale value for a specific car (based on make, model, age, mileage, condition, demand, etc.) in a specific market. In some ways, fair market value doesn't seem fair if your car is totaled, because you could end up owing more on your loan than the insurance company says your vehicle is worth.
The greatest gap between your loan value and the fair market value usually occurs in the first years of your loan. The second you drive your new car off the lot, it drops in value and keeps dropping. Value often drops 78% in one year, and 46% in 5 years. But, your loan value doesn't decrease as fast, creating a gap. It may no longer be enough to protect your car. You may want to consider optional loan protection as well.Fortunately, you can now fill this gap and protect your loan and your finances with GAP. GAP is like an airbag for your vehicle loan. It can help fill the gap between what your vehicle insurance will pay and what you owe on your loan, to cushion you against sudden out-of-pocket expenses if your vehicle is totaled. GAP is a ONE-TIME Fee that protects you for the life of the loan.