What is Gap Protection, and Do You Really Need It?

Buying a car is a big step, especially if it's your first one. It's exciting but can also be overwhelming with all the terms, fees, and insurance options. One common question new car buyers have is: What is gap protection, and do I really need it? For many, gap insurance (or Guaranteed Asset Protection) can be a financial lifesaver, preventing the stress of owing money on a car you no longer have.

In this blog, we’ll break down the essentials of gap insurance—covering what it is, why it matters, and who should consider it.

What is Gap Insurance and How Does It Work?

Gap insurance is designed to cover the "gap" between what your car is worth and what you owe on your loan if your car is totaled or stolen. Let’s look at a quick example:

Imagine you just bought a new car for $25,000. A few months later, you’re in a serious accident, and your car is declared a total loss. Your auto insurance might pay only the car's depreciated value—let’s say that’s $20,000. But if you still owe $25,000 on the loan, you’d be left to cover the $5,000 difference. With gap insurance, that $5,000 gap would be covered, meaning you avoid paying off a car you can no longer drive.

Do I Really Need Gap Insurance?

Gap insurance is especially useful if you’ve financed or leased a new vehicle. But let’s dive into a few questions to help you decide if it’s right for you:

• Did you put less than 20% down? Vehicles depreciate quickly, and a smaller down payment may mean you owe more than the car's value for a while.
• Do you have a longer loan term? Loans of 60 months or more mean you'll owe more than the car's worth for an extended time.
• Would covering the balance yourself be difficult? If paying the gap out of pocket would be financially stressful, gap insurance could help.

What Does Gap Insurance Cover (and What It Doesn’t)?

To avoid any surprises, it’s important to understand what gap insurance does and doesn’t cover:

Gap Insurance Covers - The remaining loan balance on your car if it’s totaled or stolen, after your auto insurance pays out the actual value. For example, if your car’s market value is $18,000 but you owe $21,000, gap insurance would cover the $3,000 difference.

Gap Insurance Doesn’t Cover:

• Deductibles on your auto insurance. You’re responsible for any deductible on comprehensive or collision coverage.
• Missed payments or lease penalties if you’re behind on payments.
• Additional warranties or add-ons like service plans, so these won’t be covered.

Here’s an example to make it clearer. Let’s say you have a $500 deductible on your comprehensive coverage. If your car is totaled, your insurance pays up to the current value of the car, minus the deductible. So, if you owe $10,000 on the car, but it’s worth $8,000, gap insurance would cover the $2,000 gap—but the deductible is your responsibility.

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How First Alliance Credit Union Helps You Make Smart Financial Choices

During COVID, when vehicle prices were at record highs, some First Alliance members bought cars financed at over 125% of their value. Without gap insurance, these members could have faced significant out-of-pocket costs if they totaled their car. Instead, they avoided $2,000 to $3,000 in additional expenses, showing how valuable gap insurance can be when things don’t go as planned.

First Alliance Credit Union: Here to Help

At First Alliance Credit Union, our tagline is simple: All for One, this means all we do is for every one of our members. If you have questions about gap insurance or whether it’s right for you, we’re here to help you weigh your options and make informed financial decisions.

Gap protection isn’t always necessary, but it can be a lifesaver if you’re buying or leasing a new car and want peace of mind. As with any financial decision, weigh the benefits to determine if it aligns with your needs and budget.

If you’re unsure, reach out to us at First Alliance Credit Union. We’ll walk you through your options, answer your questions, and help you find the right coverage to protect your finances.

Have more questions? Ask us!