The National Roads and Motorist's Association recently stated in a media release that the average new vehicle depreciates over thirty percent within twelve months of the original purchase. Furthermore, a used vehicle will most likely depreciate at least fourteen percent each year from its market value rate at time of purchase. Depreciation of a vehicle is based upon the loss of value compared with the amount paid for a vehicle. With the rapid loss of market value for vehicles, based upon vehicle depreciation, it is no wonder that some dealerships and banks are pushing for their clients to purchase GAP insurance policies.
If you have financed a vehicle and that vehicle is stolen, destroyed due to fire, or severely damaged in a collision and then written off by your insurance provider, there could possibly be a shortfall or "gap" between the market value of the vehicle, which is determined by industry standards and the shape of the car prior to the write-off, and the amount owed on the car. In many cases, the market value is much less than the amount owed on the car. If a driver doesn't have GAP insurance, he or she may find themselves owing money to the bank for a car that is no longer usable.
GAP or Guaranteed Asset Protection Insurance is offered by most banks or finance companies. Many will ask their customers if they are interested in this type of insurance when financing a vehicle. Today, many of the car dealerships are also offering GAP insurance for their customers, as well. In most cases, if a person is borrowing the amount of the purchase price, he or she will find out that if involved in a total loss claim, the amount of money that is awarded to them will not cover the amount owed on the car.
Many drivers are led to believe that if they carry comprehensive car insurance that this will cover the total amount owed on the car if it is involved in a collision and declared a total loss. Unfortunately, this is not true. Even those driver's that have policies that have the optional "agreed value" will often find themselves unhappy with claim settlements and owing money to the bank after all is said and done. Drivers with "agreed value" policies will probably recall that every renewal period, usually every twelve months, they are asked to lower the agreed amount due to industry standards. In most cases, you will find the agreed amount is still lower than the amount you owe on the vehicle. There are exceptions to any rule and many comprehensive plans will cover the entire purchase price of a vehicle if the following criteria apply:
- The car is less than twelve months old when involved in a total loss claim
- The replacement vehicle is the same make and model of the previous or total loss vehicle
GAP insurance could save a driver thousands of dollars if their vehicle is involved in an accident and there is still money owed on the car. However, GAP insurance is payable to the financier only. So in other words, if you do not owe more than the vehicle's market value or you owe near the market value on the vehicle, you will not need to purchase GAP insurance. GAP insurance is intended to clear the slate for consumers when they are involved in an accident; it is not intended for them to profit off the insurance. If you do not owe money to the bank or another form of creditor for a vehicle, you cannot even purchase GAP insurance. GAP insurance will also cover some of the driver's expenses when purchasing a replacement vehicle, as well. For most drivers that can carry GAP insurance, a contribution of up to $2500 can go towards your replacement vehicle; this money must go to specific costs such as stamp duty, registration, dealer delivery charges, any type of insurance excess owed by the driver, and premiums for comprehensive insurance coverage.
Most GAP policies will cover up to a certain amount on vehicle loans after the initial comprehensive insurance has paid the fair market value for a vehicle that is declared a total loss. GAP insurance pays the remaining balance due to the financier up to $10,000-$15,000 according to your policy or contract agreement.