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Is GAP Coverage Needed On My Next Car Purchase?

Since your auto insurance policy may only cover the current market value of your vehicle, you may need GAP (Guaranteed Asset Protection) insurance.

When you lease or finance a vehicle, you will be required to carry comprehensive and collision coverage on it in addition to basic liability and property damage. The additional coverage will cover the current market value (CMV) of your vehicle in the event that it is declared a total loss in an accident or if it's stolen. However, since it only covers the value of the vehicle at the time of the incident, you will still be responsible for the difference (if there is any) between the CMV and the remaining balance on your auto loan. This could leave you in a position where you are paying on a vehicle that is no longer drivable.

That's where GAP insurance comes in. This type of coverage will cover the difference, or the "gap," between the actual cash value (ACV) of your car and any remaining loan balance. This policy can be purchased either through the lender, the auto dealership you buy your car from, or from your insurance company. For car buyers who financed their vehicles with little to no money down, this coverage can be extremely beneficial.

What are the Chances That GAP Coverage is Needed?

Over time, a vehicle's value decreases. This is what is known as depreciation. A brand new car loses around 20% of its value by the end of the first year, with at least 10% of that occurring as soon as you drive it off the lot.

As an example, let's say that you purchased a new car for $21,000 with $500 down (after tax, title and licence fees), and you financed the remaining $20,500 with a subprime auto loan at a 20% interest rate for 60 months. Then, let's factor in a 20% depreciation rate for the first year ($21,000 x 0.20%), which equals a $4,200 drop in value.

That means the ACV of the vehicle would be around $16,800.  If something were to happen to your vehicle at the end of year one of your loan, where does that leave you?
is gap coverage needed

According to a standard loan amortization table, your loan balance would be $17,848.12. Without GAP coverage, the difference between the ACV that your auto insurance would cover leaves you, the borrower, owing $1048.12 on the auto loan. In the second year (September 2017 to August 2018), an additional 12% in depreciation will cause the value to drop another $2,520, bringing your ACV on the vehicle to $14,280, and your remaining loan balance would be $14,614.43. This would leave you owing $334.43 to the lender without GAP coverage.

However, by year 3 of the loan, you may start to gain equity in your vehicle - but that will also depend on the condition and mileage of the car.

GAP coverage is the most beneficial in the first few years of ownership, especially if you are dealing with a limited budget, and is an affordable way to stay protected from this problem. Below are a few examples of when you should strongly consider GAP coverage:

  • The loan contract goes beyond 48 months
  • You have little to no down payment
  • You put more than 24,000 km on your vehicle per year
  • And if you are leasing, most lenders require lessees to have GAP coverage. Typically, it will be written into the lease contract and factored into your monthly lease payment. However, it is highly recommended if it is not provided (if you already have a lease and are wondering if it is included in your payment, check your contract for details).

    Covering Your Financing

    Financing a vehicle is a major commitment, and it's important that you get the best deal possible, even if you have low credit. Canada Auto Loan works with a countrywide network of auto dealers who work with lenders who specialize in subprime auto loans. Once you complete our fast and secure online application, we will connect you with the dealer who will do everything possible to get you back on the road.

    Our service is free of charge and of no obligation, so you have nothing to lose. Start today.