The 4-1-1 On Gap Protection

What is Gap Protection?

Your auto insurance and/or warranties are there when your vehicle is damaged and needs to be repaired, but what happens if you total your vehicle when you still have a loan out? Well, if you do not have Gap Insurance and your vehicle is worth less than the remaining payment you have on your loan, you’re responsible for the rest of that payment. Now if you also have a deductible, you’d owe that as well.

The face of owing $1,500 for a totaled car

Example: If your auto loan is $20,000, and after one year you still owe $15,000, but at the time you total your car, it’s only worth $14,000. Your insurance company will pay the $14,000 value of the car, minus your $500 deductible; $13,500 – and you’re responsible for the remainder of your loan, which equals $1,500.

Gap Protection pays the difference between what the car is worth verses what you owe on it (in our mock example, we would pay your insurance $1,500 for you, covering both the difference and your deductible).

How much does it cost? It costs $599 for 60 months or less, and $699 for anything over 60 months.

So why is there a “gap” anyways? The gap we’re referring to is negative equity; when your car is worth less than what you owe on it, and this can happen to many drivers for a number of reasons:

1. Taking out a loan with an extended term – even though this will mean lower payments, it also means you build equity more slowly.
2. Depreciation – meaning your car simply loses value over time.
3. Putting little or no money down – if you finance the whole cost of the vehicle you could be in the red as soon as you drive home, considering you’d have a loan for the entire worth of the car, but the car is worth less once it is considered used.
4. Borrowing more than the purchase price – meaning you financed the tax, license, registration, etc., this will put you into negative equity before you leave the lot.

What to do? As much as you can, try to close the “gap” when you make your purchase. For some people this isn’t an option though, and Gap Protection is a great thing to have. Even if you can close most of the gap, Gap Protection is a very good way to keep yourself out of debt.

If you have any more questions, please comment below and we’ll get back to you as soon as possible! And please visit the Burlington Subaru Finance Page for any further assistance 


Additional information via Nolo
Image 1 via Bangor Daily News
Image 2 via Sketch and the City 
Image 3 via Eve Sob