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What Is GAP Insurance and How Does It Work?

You’ve got a new car, your financing is top notch, and you have insurance established. Check, check, check! U are ready to go!

At UMe, we want our members to have the best car-buying experience available! That includes setting U up for success in case life takes an undesirable turn. Sometimes, regular ol’ car insurance isn’t enough to cover unexpected expenses. So, that’s why we offer Guaranteed Asset Protection (aka: GAP insurance).

With UMe’s GAP insurance, here’s what you get:

  • A 90-day trial period
  • Up to $500 deductible reimbursement twice a year
  • Flexible payment options
  • Plus, GAP insurance may cancel up to $2,500 of your next loan with UMe when you purchase a replacement vehicle.

What is GAP insurance you ask? And how does it work? Let UMe steer U in the right direction!

Illustration of Car driving into the sunset with the UMe emu mascot waving from inside the car

GAP Insurance: The Basics

GAP insurance stands for ‘Guaranteed Asset Protection’ insurance. It is an optional (but smart) car insurance coverage that applies if your car is stolen or is deemed a complete loss. In some cases, you might owe more money for your car than it is worth. And you guessed it, GAP insurance fills that monetary gap.

You only need to consider GAP insurance if you’re leasing or financing your vehicle. If you own your car outright and don’t have a car loan or a lease, you’re all good.

Did you know that if your car is stolen or totaled, you’re still responsible for paying off your car loan even if your insurance payout isn’t enough to cover it? GAP insurance is meant to be used in conjunction with collision or comprehensive coverage, which can only be as high as your car’s value. And, since most cars tend to lose value every day just sitting in LA traffic, GAP insurance could come in handy.

The Dreaded Depreciation

You’ve probably heard that a vehicle loses value the moment you drive it off the lot? That’s what depreciation means. As soon as you leave a car dealer with your new ride, cruising down the street with that new-car smell, your car is likely going down in value. (There are exceptions, of course!)

Now the real bummer: In fact, it is estimated that the value of a new car drops by about 20% in the first year of ownership!

While a standard auto insurance policy covers the ‘market value’ of a car at the time of a claim, GAP insurance helps protect against the dreaded depreciation.

How Does It Work?

Okay, it’s not fun to think about, but let’s say your car gets totaled. You would then file a claim with your auto insurance company, and your coverage would pay the actual cash value (“ACV”) of your vehicle minus your deductible. Well, if your car is totaled, the ACV could end up being a lot less than what you still owe on your loan.

GAP insurance will pay the difference between your vehicle’s ACV and the outstanding balance of your loan or lease. Note that there is a possibility that if your GAP coverage is limited, it might cover only part of your outstanding balance. Also good to note is that GAP coverage does not cover additional loan charges, property damage, or injuries.

IRL Example

Let’s take a look at an in-real-life (IRL) example of how GAP insurance can work for U.

For example, you have financed a vehicle and pay for standard auto insurance. At this point you still owe $10,000 on your loan and, for the most part, everything is great! Suddenly, you get into an accident and your car is totaled. Insurance determines your car’s ACV is only $7,000 and they issue you a check for this amount.

So then what about the remaining $3,000 owed on your loan? You’ll still be on the hook for that money!

 

This is exactly where GAP insurance would come into play. Depending on your type of GAP coverage, your auto loan could be paid off and you could be on your merry way to picking out your next ride. Without GAP insurance, you could find yourself in a bit of a bind.

Wait. Do I Need GAP Insurance?

If you own your car and have no payments, you don’t need it! You only need to consider GAP insurance if you’re financing or leasing your car. You can compare the value of the vehicle you want to purchase using Kelley Blue Book with the amount of your loan. If your loan amount is more than the car is worth, GAP insurance may be for you.

There are other situations when GAP insurance may be worth it:

Down Payment Amount

If you put down less than 20% when financing a vehicle, there is a chance you could wind up owing more than the car is worth if the car is totaled or stolen. Until you are able to fill that cash gap yourself, GAP insurance can help if you get into a bad situation.

Loan Term

If you opt to take out a car loan with a longer loan term, you may end up making interest payments primarily versus paying down the principal part of the loan. This may result in you finding yourself “underwater” on your car loan – meaning you find yourself owing more than the car is worth. GAP insurance can come in handy in this situation if there is a total loss on the vehicle.

Depreciation Rate

You probably assumed this already, but some cars can depreciate faster than others. But you’re smart (because you’re on the UMe blog reading up right now), so you know you can research car depreciation rates so you don’t end up purchasing a vehicle destined to go down in value quickly.

Filling the GAP With UMe!

UMe will always help U to drive with as much confidence as humanly possible. That’s why our GAP insurance includes up to $500 deductible reimbursement twice a year, flexible payment options, and a 90-day trial period. Plus, GAP insurance may cancel up to $2,500 of your next loan with UMe when you purchase a replacement vehicle.

So, never fear… GAP insurance is here! Learn more about the benefits of our GAP coverage today to keep U in the driver’s seat!

[see our gap insurance benefits]

Or give us a call or send us an email for more information.

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Disclaimer: U matter to Me (all of us) at UMe — and that’s why we do our best to deliver helpful information on our blog. Please note the following: (1) UMe Credit Union works hard to make certain that the information we post here is as accurate as humanly possible. But as you know, information can change and evolve quickly. While we try to update the blog on a regular basis, the content of some older posts may not be correct or up-to-date. (2) Some destinations on the World Wide Web that we link you to will exist on external websites. UMe Credit Union does not officially endorse any connected sites, nor do/did we compensate or get compensated by any entities to be featured in our posts (unless otherwise noted). (3) Everyone’s situation is unique and we advise you to consult with our personal bankers or your finance, tax, or legal professional for advice individualized to you!