Guaranteed Asset Protection (GAP) insurance is often found to be sold by the car dealer while purchasing a new car. The significance of GAP insurance is that in case of the car being stolen or written off under any circumstances, the GAP insurance very significantly covers the difference between the value of the car(the amount that the insurer actually pays out) and the actual amount that has been paid on the first place. So, it actually makes sense to buy GAP insurance.
This is a fact that even under the scenario when your car is wholly comprehensive, you have the dire chances of losing money if your new car is being stolen or written off. This is indeed because the depreciation means new car loses their value fast. As per the trends, a new car undergoes 60% depreciation in the first three years. For an instance, if a new car costs $15000 and the car is written off after three years, you would receive the current depreciated value of $6000 only which would not be enough to buy a new car with that money. So, the GAP insurance plays a significant role in order to cover the difference in between what the insurer pays out and what you paid for the car or what that you owe on the car.
Is GAP insurance really needed?
GAP insurance becomes useful because you are at a risk of being in negative equity. You have the chances of owing more than the car is if:
- The down payment made initially was really small.
- The kind of the care that was purchased loses value really quickly.
- If you are ending up paying a lot of interest.
- If you are in the process of paying off the debts slowly (for e.g.: 5 years or more)
When is GAP insurance probably not suitable?
Guaranteed Auto Protection insurance is probably not suitable under the following circumstances:
- The car that you own is less than 12 months old and you are the first registered owner. This is because most of the fully comprehensive car insurance policies offer a ‘new car replacement’ during the first twelve months of its purchase.
- If you are already covered by your finance agreement, then there is no need to purchase GAP insurance. If your finance agreement is already covering the difference between the ‘book prices’ (which signifies the official value of the car) and how much is actually paid, and then there is absolutely no requirement to have an add-on Guaranteed Auto Protection insurance.
- If you have the major financial strength of affording to make up the shortfall in the insurance payout, then there is no requirement of purchasing GAP insurance.
Types of GAP insurance
There are three major categories of GAP insurance. They are as follows:
- Finance GAP Insurance wherein you have borrowed an amount to purchase a car, you have chances of still owing more than the insurance company will probably pay out.
- Return to invoice insurance which is being designed to top up the payment from your car insurance so that you get back what exactly you paid for the car.
- New car GAP insurance is like return to invoice insurance but this is being designed to compensate for the rising cost of the cars.