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You're driving through an intersection when you get t-boned by another car. You're fine, but your car is totaled. Since you’re still paying off this car, you may wonder: What happens to that loan? Will your car insurance cover the balance?The answer is, it depends. Your car insurance will only cover the current value of the car. If the balance on your car loan is larger than that, you will have to cover the difference out of pocket. That is, unless you purchased a GAP waiver agreement when you financed the car. If you did, the full amount of the loan will be covered by this policy. Here’s what you need to know about a GAP waiver agreement, including:
What it covers
What it costs
If it’s worth it
If it’s required
How to get it
GAP Waiver Meaning
GAP (Guaranteed Asset Protection) insurance is an optional add-on to your car loan contract that waives your obligation to pay the remaining balance on your auto loan in the event your car is totaled or stolen before you’re finished paying it off. GAP waivers are available for both new and used cars.A GAP waiver is typically purchased when you take out a loan or refinance a car loan and can be paid in one lump sum or rolled into your auto loan. Once purchased, GAP will provide coverage for as long as your loan remains in place, provided you adhere to the terms of your loan contract.Without a GAP waiver, insurance will only cover the car’s actual cash value (ACV), also known as its book value, in the event the car is totaled or stolen. You would then need to make up the difference between that amount and the loan balance.Recommended: How Do Car Loans Work? Auto Loan Basics
What Is Loan-to-Value (LTV?)
A loan-to-value (LTV) ratio is the total value of your loan divided by the ACV of your car. You can use this formula to figure out the LTV ratio, expressed as a percentage:Loan amount / car value x 100 = LTVSo. if you’re borrowing $30,000 to finance a car valued at $35,000, the LTV would be 86%. If after a few years, you still have $20,000 left to pay on your loan and the car’s value dropped to $15,000, your LTV would be 133%, which means you owe more than the car is worth.In this scenario, if your car got totaled or stolen, you would have to cover the gap between your loan balance ($20,000) and the car’s value ($15,000), or $5,000. If you had a GAP waiver, on the other hand, insurance would pay it.
What Does GAP Cover?
Regardless of whether your car is damaged to the point that it is unusable or it was stolen, a GAP waiver will cover the remaining balance on your car loan that your auto insurance policy won't pay for. In some cases, GAP waivers will also cover the cost of your insurance deductible, up to a limit as defined by your contract.
What Doesn't GAP Cover?
GAP typically only kicks in when your car is damaged beyond repair or has been stolen And it only covers what you owe on the car. This means GAP won't cover other people or their property. It also means it won't foot medical bills or legal costs related to an accident. Other costs GAP typically doesn’t cover include:
Loan balances over a specified LTV (such as over 150%) or amount
Refundable additions made to your loan or lease contract, such as a vehicle service contract
Loan interest accrued after the date you lost your car
Past due loan payments
Late charges and other fees
Cost of renting a car
When Is a GAP Waiver Required?
Except in lease situations, GAP waivers are not required. However, there are several scenarios where it may be worthwhile to purchase a GAP waiver. Below are some to consider.
Upside-Down Auto Loan
If you have an upside-down auto loan, which means the amount you owe is more than the cash value of your car, then it may be a good idea to add a GAP waiver. If you were to total a car with an upside-down loan (or it got stolen), you would end up owing more to the lender than the insurance would pay out (which would max out at the car’s current value).
Little Down Payment
The more money you put down on a car, the lower your LTV ratio, and the lower the chance you’ll ever owe more than your car is worth. If you put down less than 20% on a new car purchase, however, it might be worth getting a GAP waiver. Depreciation starts as soon as you drive the car off the lot, and having a high loan balance exposes you to out-of-pocket costs in the event your car’s stolen or totaled.
High Mileage
If you put a lot of miles on your car, it will depreciate faster. That means if your car became unusable at some point, its value could be lower than the amount you owe on the loan. This could expose you to costs in the event that it gets totaled or stolen.
Luxury Car
Luxury cars often depreciate faster than cars that are known for their reliability and resale value. Before financing your car, and making a decision about a GAP waiver, you might want to research the make and model of the car and how quickly you can expect it to depreciate. If the value will decline quickly, a GAP agreement could be a good thing to have in your back pocket.
High Interest Rates
When you take out a car loan, you pay more towards interest than principal in the beginning, particularly if the interest rate is higher than average. Your car’s value, however, starts declining right away. If the car were to get destroyed or stolen before you’ve had a chance to build much equity, you would likely owe more on the loan than the value of the car.Loan Term Is Higher than 48 MonthsA long loan term creates a problem similar to having a high interest loan. The longer the loan term, the longer it will take you to build up equity. This leaves you vulnerable to a period of time during which your loan balance may be higher than the value of the car.
Leased Vehicle
Some lenders require you to have GAP coverage when you lease a car. A GAP waiver (or something similar called loan/lease coverage) may be part of the agreement when you lease a vehicle. Should your car get totaled or stolen, and you need to terminate your lease early, it will cover the "gap” between the early termination payoff and the value of the car.Recommended: Can You Extend a Lease on a Car?
GAP Waiver Versus GAP Insurance
A GAP Waiver and GAP insurance offer the same type of coverage. The only difference is where and when the policy is purchased.A GAP waiver is an add-on that's offered by your lender or finance company when you take out a loan on the car or when you refinance it. GAP insurance, on the other hand, is an outside product that's available through a licensed insurance agent or broker and can be purchased at any time, even if you’re using a loan to buy a car from a private seller.
What Are the Benefits of GAP Waiver Insurance?
GAP waiver insurance isn’t necessary but it provides peace of mind that, should your car get totaled or stolen, you won’t get hit with having to pay off a major part of your loan. Your existing auto policy typically only covers the cash value of your car. Because of depreciation, there's a chance that your coverage won't be enough to pay for the full amount of the loan, particularly during the early months or years of your loan, when you haven’t built up much equity in your car.
GAP Waiver Agreement
When you purchase a GAP waiver, you will receive a GAP waiver agreement that spells out all the terms and conditions of the GAP insurance, including what is and isn’t covered, if there is a cap on the LTV ratio or loan amount, and the GAP refund policy.
Buying a GAP Waiver Agreement
A GAP waiver is typically offered as an additional option to your loan when you are buying or refinancing a car. You generally have the option of paying for it up front in one lump sum or having it folded into the loan. You’ll sign the waiver at the same time as you sign the rest of your loan documents.
Adding GAP Coverage to an Existing Loan
A GAP waiver may only be purchased at the time you are taking out a new loan or refinancing an existing loan; you can’t add it on later. You can, however, purchase GAP insurance from an outside lender at a later date, as long as the loan has not been fully paid off.
The Average Cost of a GAP Waiver
If you purchase a GAP waiver from a lender or financing company at the time of financing or refinancing, the average cost is $500 to $700. While it may be hard to come up with that full amount all at once, if you fold this cost into your loan amount, you will pay interest on the cost of the waiver.
Purchasing GAP insurance separately from an insurance company tends to cost less. You may be able to get GAP insurance for $20 to $40 per year if you bundle it into your existing auto insurance policy.
GAP Refund
Unless GAP was required by your lender (such as in the case of a lease), you can typically cancel it at any time. And, you may be able to have all or some of the cost refunded. It all depends on what’s in your contract, how soon you ask for a refund, and how you paid. You may be able to get a full refund if you cancel within a certain period of time (such as 30 or 60 days). If it’s later than that, and you paid in full up-front, you may be able to get a prorated amount back. If you rolled the cost of the waiver into your loan amount, it will likely be harder to get a refund.
What Happens to My GAP Waiver When I Refinance My Vehicle?
Because the GAP waiver is tied to your original loan, it won’t carry over to your new loan when you refinance your car. However, you may be able to get a refund of some of the cost of the waiver. In addition, you can purchase a GAP waiver for your new loan through your new lender.
The Takeaway
GAP coverage can make sense in any situation where your loan balance is likely to be larger than your car’s actual cash value, such as when you’re starting out upside-down on a car loan, you have a high interest rate, you put little down on the car, or you put a lot of miles on your car.If you already have an auto loan, but lack a GAP waiver, refinancing can give you the opportunity to buy a GAP waiver for the new loan (and if you’re able to get a lower rate, you could also lower your payments). If you’re interested in researching your auto loan refinancing options, Lantern by SoFi can help. Just fill out one simple form to access loan offers from multiple lenders in our auto refi lending network.
Frequently Asked Questions
What is the GAP waiver price?
Why is it called a GAP waiver?
What happens to my GAP waiver when I refinance my vehicle?
Photo credit: iStock/sefa ozel
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About the Author
Jackie Lam
Jackie Lam is a freelance writer with experience covering small business, budgeting, freelancing and money, and personal finance. She has written for more than 60 outlets, including Salon.com, CNET, BuzzFeed, Business Insider, and Time's NextAdvisor. She is currently working on her AFC® financial coaching certification to help artists, freelancers, and small businesses.
