5 Reasons to Consider GAP Insurance on Your Next Automobile Loan

One of my coworkers at the credit union recently forwarded me a news clip about a single mother whose car caught on fire. The young mother was stunned when she learned that although the car was totaled by her insurance company, she still owed $5,000 on the loan she'd taken out to buy the car. On top of this stress, she needed a new car to replace the one that had been totaled. You can see the news clip here.

Her story resonated with me. Right after I graduated from college, my car was totaled in an accident, although I was lucky and had money on hand to pay off my loan. Had I known about Guaranteed Asset Protection (GAP) Advantage, though, I would have purchased it. Here are five reasons why:

It protects you when you owe more than the vehicle is worth. A new car's value depreciates an average of 11% the moment it's driven off the dealer's lot, and over the next six years, its total value will drop by about 60%. What many consumers don't understand until it's too late is that a standard automobile insurance policy only covers the depreciated value of an automobile at the time of the loss, not the balance they owe on the auto loan, which can be substantially higher than the car's value. Once their insurance company issues a check for the Blue Book value of the car, minus the deductible, these consumers find themselves in the unenviable position of still owing money on a loan, sometimes more than they have on hand. GAP Advantage covers this deficiency, however. If your car is ever totaled in an accident, you don't have to worry about paying on a car that's heading for the junk heap.
Higher vehicle and repair costs mean more of a chance of your vehicle being totaled after an accident. In February 2018, JD Powers reported the average new car price in the U.S. was $32,237, up from $31,302 the previous February. Auto prices will continue to rise because of increased costs in technology, safety features, raw materials like steel and aluminum, and regulatory compliance. And because today's automobiles have so many bells and whistles, this means more can go wrong, even in a minor wreck that years ago would have been repairable under a standard insurance policy. Take an airbag deployment, for example. If your airbag deploys during an accident, it can cost upward of $1,000 to replace it depending on the make and model of your auto, and costs can easily hit $3,000 to $5,000. Moreover, newer car models usually have multiple airbags. Couple these repairs with the structural and mechanical damage incurred during an accident, it's not that hard for an insurer to deem a car with only moderate damage a total loss.
GAP coverage is fairly inexpensive at less than $2 a week. Most auto dealers will offer a policy when you're buying a car, which they'll charge about $800. With GAP Advantage, you'll pay $399 for peace of mind knowing that if your car is stolen or totaled in an accident, you can walk away from your loan without owing a penny. The total cost of the plan can be rolled into your loan, adding only a few dollars to your monthly payment.
The Blue Book value is helpful during the buying process, but not so much when your vehicle's a total loss. "Insurance companies will use NADAguides to determine the value of a car at the time of a loss," said Mike Rzeszutek, Hanscom FCU's Vice President of Sales and Training Manager. He explained that the NADA guide provides four values for the make and model of a car: a Rough Trade-In value, which is what would be used for a vehicle going to auction and has the lowest value; an Average Trade-in value, for a car that has moderate wear-and-tear; a Clean Trade-In value, for a vehicle that has no wear-and-tear; and a Clean Retail value, which is basically a brand-new car. He said, "We use that Clean Trade-In value when determining the value of their car at the time of loss, where most insurance companies use the lowest value -- the Rough Trade-In value."
Some GAP policies offer other benefits that ease the sting of a total loss. Hanscom FCU's GAP Advantage program will pay off the balance of your loan plus cover the cost of your deductible if your vehicle is a total loss or stolen. You'll need a new car, so the plan will also give you $1,000 to apply toward the principal of a new vehicle through GAP Advantage. And let's say you get in a fender-bender with any vehicle you are titled and insured on: Hanscom FCU's policy will also cover your deductible up to $500 as many times as needed for up to three years.