About Guaranteed Asset Protection: GAP waivers versus GAP insurance

When you finance a vehicle, you are responsible for the value of the loan. That is usually a lot of money with loan values totaling tens of thousands of dollars! However, what happens if you crash your car or someone steals it? What are you supposed to do if the value of your vehicle, which is covered by insurance, is not sufficient enough to cover the total value you owe on the loan? These are valid concerns, and yes, it is important to protect your vehicle in the event of an accident or theft. Guaranteed Asset Protection, or GAP, is the most commonly used method to protect your car loan.

What is Guaranteed Asset Protection?

Guaranteed Asset Protection helps to protect you by covering the difference between the value of your loan and the value of the vehicle. It applies to “total loss” situations which are usually determined by your car insurance provider. Here is the definition from our auto refinance term glossary.

• Guaranteed Asset Protection, or GAP, is an additional product you can purchase when you finance or refinance an auto loan. When you take out a car loan, you are required to repay the loan in full. This obligation remains if your car is damaged, “totaled”, or stolen. You may therefore have to pay out of pocket if the insurance claim proceeds do not cover the remaining balance of the loan. With GAP, the lender will waive any balance on the loan remaining after the insurance proceeds are applied to the loan.

What does GAP coverage apply to?

GAP is applied to your vehicle loan. As we can see from the definition above, it assists you in paying off your loan and helps you avoid paying for any differences in vehicle value out-of-pocket which can save you money.

For example, if you bought a Kia Telluride EX SUV and financed $40,000 for the purchase, this is how much you need to pay back to the lender. For this hypothetical situation, let's say you also wisely decided to take out a car insurance plan which includes comprehensive physical damage coverage. If you crashed your Telluride and the SUV was written off by your insurance provider as a complete loss, your comprehensive policy would pay you the actual cash value, or ACV, which is near the present market value of the vehicle. The market value can vary depending on things like depreciation, age of the vehicle, mileage, aftermarket add-ons, and other factors. However, there is often a difference between the ACV insurance settlement and your car loan value which can leave you "upside down" on your loan by owing more money than the SUV is worth.

This is where Guaranteed Asset Protection comes in to help cover the cost difference. If your insurance settlement paid out only $32,000 for the ACV and your SUV loan was $40,000, GAP would help cover the additional $8,000 needed to meet your Telluride loan's total cost. Without GAP coverage, you may have to pay the difference between the amounts yourself.

How much does GAP cost?

GAP coverage is usually very affordable compared to the protection and peace of mind it provides. The cost is dependent on your car loan's value, your vehicle, and other details. For example, if you have a car loan around $20,000, you can often refinance your loan and add GAP coverage for a monthly payment of $10 to $15 extra on top of your monthly car payment. It is usually well-worth it for the average car owner who wants to protect their vehicle and assets.

How does a GAP waiver differ from GAP insurance?

The Guaranteed Asset Protection coverage is often generally referred to as "GAP insurance", but this is not exactly correct. There are different types of GAP coverage including waivers and insurance. The product comes in a few different offerings through different providers and works differently.

A GAP waiver is an agreement specifically offered by your lender. The waiver cancels or waives your responsibility for the difference between your insurance settlement and your loan balance in the event of a total loss. The waiver is not insurance because insurance would involve a settlement, but the finance company offering the waiver doesn't need to settle with themselves. A GAP waiver is also sometimes offered by car dealerships as part of the financing package on a new vehicle. Refinancing your car loan is another way you can easily add GAP waiver protection.

GAP insurance is similar to a GAP waiver in that it covers the "gap" between your insurance payout and your loan balance in the event of a total loss. Your car insurance provider offers this coverage as an insurance product which is why it differs from the lender offered waiver. If you needed to make use of the insurance, the insurance company would pay off the difference to the lender between the insurance claim settlement and the loan value. You can often add GAP insurance to your car insurance coverage.

Which coverage type is better?

GAP waivers and insurance are pretty similar. The main difference is in how they are attached to your car loan versus car insurance. If you wanted to roll the cost of GAP into your car loan, you could add a GAP waiver on to your refinanced loan pretty simply for a few extra dollars a month. Rolling it into your loan allows you to maintain the coverage for as long as you are making payments. If you wanted to take the insurance route, you could add GAP insurance to your current car insurance policy. The GAP insurance would add an additional policy to keep track of, so make sure to auto renew the policy.

Should I get GAP protection for my car loan?

If you’ve ever been offered GAP by a dealership or during a refinance, your first question might be “is it actually worth it?” The answer is most often yes — having GAP is beneficial. You should also ask, "Can I afford not to have GAP?" That answer depends if you can afford to pay out the difference if your car is totaled. You might want to get GAP if your loan amount is close to or higher than your car’s value, and you want to be protected in a total loss situation. This is because your car will almost always keep losing value over time, increasing the “gap” between your loan amount and value. 

There are many reasons that your car loses value, including mileage and age like we talked about before. But sometimes cars can lose a lot of value instantly because of events outside of your control. For example, the value of cars decreased in 2020 due to low demand during the COVID pandemic and increased later during 2022 because of inflation. Recalls can also affect market values since a car with an open recall can be less appealing to car buyers even if you’ve gotten your car repaired. If your car’s value is much higher than your loan amount and you are fairly certain it will stay that way, then you probably don’t need GAP as much.

What if I don’t need GAP anymore?

The low cost of GAP makes it an affordable option to keep for the life of your car loan. However, there are a few things you can do if you feel like you no longer need GAP coverage. You can often remove or cancel the coverage from your car loan or insurance policy if you want to change GAP providers or if you feel no longer need it because you’ve paid your loan down enough.

GAP FAQs

• What is GAP? GAP is a loan add-on that protects you against loss if your vehicle is totaled and the insurance pay off amount is less than the amount you owe. With GAP,  the lender will waive any balance on the loan remaining after the insurance proceeds are applied to the loan.

• What does GAP coverage apply to? GAP is applied to the outstanding balance of your car loan.

• How much does GAP cost? GAP coverage normally adds $10 to $15 a month extra on top of your monthly car payment.

• What is a GAP waiver? A GAP waiver is an agreement specifically offered by your lender. The waiver cancels or waives your responsibility for the difference between your insurance settlement and your loan balance in the event of a total loss.

• What is GAP insurance? GAP insurance is a coverage offered by your car insurance company which pays off the difference between the insurance claim settlement and the loan value. The difference is paid to the lender.

• How does a GAP waiver differ from GAP insurance? GAP waivers are offered by lenders while GAP insurance is offered by insurance companies. They have the same outcome in satisfying the outstanding car loan balance.

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