Whether you lease or own a Honda, Guaranteed Auto Protection (GAP) insurance can protect you if your vehicle is deemed a “total loss” due to an accident, theft, or natural disaster. Any Honda you lease or purchase loses value when you drive it off the lot. In either case, an accident that causes irreparable damage to your vehicle can be a nightmare for your insurance company. Insurance companies can only replace an owned Honda at its actual cash value if you do not have additional coverages in your policy (ACV). In this case, leased Hondas can be even more complicated.
What is Gap Insurance, and When Do You Need It?
Gap (Guaranteed Asset Protection) insurance, also known as loan-lease payoff coverage, provides car owners with valuable financial protection during the early stages of their vehicle’s life. If you have a loan or lease on your car, gap insurance could be a good way to save money. If your vehicle is totalled, gap insurance will pay the difference between the outstanding loan balance and the vehicle’s actual cash value (ACV).
How Does Gap Insurance Work?
Assume your car is totalled as a result of a covered incident such as theft, an accident, a hurricane, flooding, or vandalism. If you have comprehensive or collision insurance, your insurance company will pay the actual cash value of your vehicle at the time of the incident. If it happens during the first few years of your car’s life, this amount will be less than the amount you still owe on your car loan or lease. When the ACV is less than what you owe a financial company, the gap is defined as the financial shortfall you owe. If you are upside down (owe more on your loan than the value of your car) and your car is totalled in an accident, this insurance is extremely useful.
What are the Gap Insurance Terms?
Before purchasing gap insurance, it is best to understand its terms to ensure that it will provide the necessary financial support. While some gap policies will pay the deductible you paid on your primary insurance, not all policies will. For example, suppose you purchased a car for $20,000 with a $1,000 down payment and $500 deductibles for physical damage and losses. If you are in an accident soon after purchasing, your balance loan will be $18,500 at 0% interest. If the ACV of your car is $16,000, the insurance company will pay $15,500 ($16,000 minus the $500 deductible). In this case, gap insurance will assist you in paying the remaining balance on your loan (either $2,500 or $3,000, depending on whether your gap policy includes deductibles).
How Much Does Gap Insurance Cost?
If you buy gap insurance from an insurance company and bundle it with your collision or comprehensive coverage, it can cost you around $20 per year on average. If you purchase it from a lender or a dealership, you may be required to pay a one-time fee of $500 to $700.
When is Gap Insurance Required?
If you’ve made a small down payment or none, gap insurance may be a good idea. In addition, if your loan term is four to five years, you should consider getting gap insurance. Gap insurance is almost always required for those who lease a car. In fact, gap insurance is often included in lease agreements. Another good time to purchase gap insurance is when the vehicle you have purchased loses value faster than other vehicles.
Although gap insurance is not required by law, it is a good idea to have one if you owe more money on your loan than the value of your car.
