Gap Insurance vs Loan/Lease Payoff: Cars Protection Plus Discusses Whether You Need Either One

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You know about all different kinds of vehicle insurance, but what is gap insurance? Guaranteed asset protection (gap) insurance is usually for loans or leases on new cars that have never been titled before. Gap insurance is good to have if your car is stolen or totaled and you owe more on your loan than your vehicle’s depreciated value.

Gap insurance and loan/lease coverage can be purchased through various auto insurance companies, through some auto dealerships and through extended warranty policy providers such as Cars Protection Plus.

Is gap insurance really necessary?

Let’s say you purchase a new car for $30,000 and take out a car loan for $28,000. When driving off the parking lot of the dealership, you know your car just lost some value. According to the Insurance Information Institute (III), when you drive a brand-new vehicle off the lot, its value immediately decreases about 10% in the first month and up to 20% in the first year. It continues to decrease in value over time.

Continuing this example, a year after you’ve had the car, you total the car in an accident. Your auto lender has required both collision and comprehensive insurance on the vehicle, so your auto insurance company will pay the auto lender up to the car’s depreciated value. If your car is worth $24,000 at the time of the accident or theft, auto insurance will cover up to that amount. But you will still owe your auto lender $28,000, which means you will owe your auto lender the $4,000 difference between the depreciated value and the loan amount.

Will I still be liable to pay the full loan amount if my car is totaled?

Yes. You are still on the hook for the original loan amount, regardless of whether the car is totaled or stolen. This is where gap insurance comes in handy. With gap insurance, the gap insurer will pay the difference between what auto insurance covers and the original loan amount. Usually, you’ll need to have both collision and comprehensive coverage on a car in order to purchase gap insurance.

What is loan/lease payoff coverage?

Loan/lease payoff coverage is similar to gap insurance and some companies use the term interchangeably. If your car is stolen or totaled, loan/lease payoff coverage will pay up to 25% of your car’s actual cash value after your auto insurance company has paid you.

Gap insurance usually needs to be purchased within 30 days of the car’s purchase or lease while loan/lease payoff coverage can be purchased at any time you own or lease the vehicle. Loan/lease is also good for used cars, since true gap insurance is usually only offered early on in owning or leasing a new car.

Anytime you finance more than 30% of your car and think you may be upside down on the loan for any amount of time, you should consider either purchasing gap or loan/lease coverage. Both gap insurance and loan/lease coverage are relatively affordable as coverage providers don’t assume much risk and they are usually for a short duration.


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