GAP stands for Guaranteed Auto Protection. It is an optional type of auto insurance that is available in many states to purchase if you still owe money on a new or used vehicle. GAP insurance offers protection against financial liability for those who have financed a vehicle which the market value or actual cash value (ACV) is less than what is owed on the loan.
Some carriers sell this along with physical damage coverages as an added benefit or optional coverage. Typically, it is called Loan/Lease Coverage, Auto Loan/Lease Coverage, or Loan/Lease Payoff Coverage.
GAP insurance helps cover the deficiency balance that is left after your vehicle has been declared a total loss. This optional insurance does so by paying the difference between actual cash value paid out by the insurance company for your vehicle loss and the current outstanding balance of your loan or lease. Some GAP policies will also pay your regular insurance deductible as part of your coverage.
Here is an example with fictitious numbers: You purchase a vehicle for $28,000, after one year the market value of your vehicle is down to $21,000 and you owe $25,000 on your loan. That would leave a gap of $5000 that you would be responsible for if your car was stolen or declared a total loss from an accident and you were to receive actual cash value as a settlement on the vehicle. GAP insurance (that paid for your deductible as well as the difference) would cover the $5000 that without the GAP policy you would be responsible for to your lien holder.
Example in line form:
- Loan Balance After One Year- $25,000
- Vehicles ACV After one year- $21,000
- Your Deductible Amount -$1,000
- Insurance Settlement -$20,000 (ACV of $21,000 - $1,000 deductible)
- Amount still owed - $5,000(Gap between loan amount and settlement paid to you)
- GAP Insurance payout -$5,000
- Balance on loan after ACV settlement and GAP insurance payout - $0
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