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When it comes to protecting your finances after purchasing your car or truck, understanding the difference between GAP waivers and GAP insurance is crucial to making sure you have the right coverage. Both options can provide peace of mind by covering the “gap” between what you owe on your car loan and the car’s value in the event of a total loss or theft—but they work in different ways.
Below, we’ve broken down the key differences, benefits, and drawbacks of GAP waivers and GAP insurance so you can make an informed decision that suits your needs and budget.
About Guaranteed Asset Protection
Financing a vehicle often means taking on a significant loan—sometimes tens of thousands of dollars. But what happens if your car is totaled in an accident…or stolen? What do you do if your insurance payout isn’t enough to cover the remaining balance of your loan? These are important questions, and protecting yourself financially in these situations is crucial.
That’s where Guaranteed Asset Protection, or GAP, comes in—it’s one of the most effective ways to safeguard your car loan in case the unexpected happens.
What is Guaranteed Asset Protection?
Guaranteed Asset Protection, or GAP, 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.
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. 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.
Here’s a helpful example: Imagine you purchased a Kia Telluride EX SUV and financed $40,000 for the loan. If you also took out a comprehensive car insurance plan, which covers physical damage, and then crashed your Telluride, the insurance company might declare it a total loss. In this case, your comprehensive policy would pay you the actual cash value (ACV), which is close to the vehicle’s current market value. This value can fluctuate based on factors like depreciation, the car’s age, mileage, and any aftermarket modifications. However, the ACV settlement from your insurance may not cover the full amount of your car loan, potentially leaving you “upside down”—owing more than the car 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.
Looking for GAP coverage?
Add Guaranteed Asset Protection protection to your refinanced car loan. Rolling it into your payment helps ensure you will have it for the life of your loan.
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 of 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.
GAP Insurance vs Gap Waiver – What’s the Difference?
Guaranteed Asset Protection (GAP) coverage is often called “GAP insurance” or “GAP waiver insurance,” but these terms are not entirely accurate. There are different types of GAP coverage, including waivers and insurance, and they work in slightly different ways depending on the provider.
A GAP waiver is an agreement offered by your lender that cancels or waives your responsibility for the difference between your insurance settlement and your loan balance if your vehicle is deemed a total loss. Unlike insurance, which involves a settlement process, a GAP waiver does not require a settlement from the lender, as they are essentially waiving the balance themselves. Dealers sometimes offer GAP waivers as part of a financing package when you purchase a new vehicle, and you can also add a GAP waiver when refinancing your car loan.
GAP insurance, on the other hand, is similar in that it covers the difference between your insurance payout and your loan balance in the event of a total loss. However, it is an insurance product offered by your car insurance provider, which is why it differs from the lender-offered waiver. If you need to use GAP insurance, the insurance company would pay the difference directly to the lender. You can often add GAP insurance to your car insurance policy.
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.
Know your loan amount is covered
Having GAP on your refinanced loan covers your loan amount and gives you peace of mind. Ask your loan officer how you can add GAP to your loan.
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? Knowing when to cancel GAP insurance
GAP coverage is typically low-cost, making it an affordable option for the duration of your car loan. However, if you feel you no longer need it, there are options to adjust your coverage. You can usually remove or cancel GAP coverage from your car loan or insurance policy if you want to switch providers or if you’ve paid down your loan enough that you no longer need the protection.
Frequently Asked Questions about GAP
- 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 that 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.
GAP coverage—whether in the form of a waiver or insurance—provides vital protection against financial loss if your car is totaled or stolen. By covering the difference between your car’s value and your loan balance, GAP ensures that you won’t be left paying out-of-pocket for a loan you can no longer benefit from. If you’re ready to add this crucial protection to your refinance, Caribou makes it easy to get started. Combine auto refinancing with GAP insurance for both savings and peace of mind. Start the refinance process in minutes through Caribou and check your rate today!
