As you look over the final details of your new car purchase, you might notice some fine print about GAP insurance. Also known as "guaranteed auto protection," GAP insurance protects you and your lender from significant losses in the event of an accident resulting in a total loss of your vehicle. GAP covers the gap between the actual value of your vehicle and the remaining amount on your auto loan.

Why Do You Need It?

The minute you drive your brand-new vehicle off the dealer lot, it instantly loses as much as 11 percent of its value. Unfortunately, you won't get an 11-percent discount off your auto loan just because of the depreciation hit. Within a year, your car could lose as much as 25 percent of its value. Unfortunately, your loan payments may not keep up with your vehicle's ongoing depreciation, resulting in a significant gap between your car's actual value and the amount you still owe on your loan.

If you get into an accident where your vehicle becomes a total loss, your insurance provider will pay your lender for the actual cash value of the vehicle. Unfortunately, it may not be enough to cover the loan amount. This could leave your lender out of a significant chunk of cash, which means you'll be on the hook for the difference. GAP insurance effectively bridges this gap by paying the difference between the actual value and the total loan amount.

Pros and Cons of Having GAP Insurance

GAP insurance comes in handy when you're buying a brand-new vehicle with dealer or bank financing. In fact, most lenders require you carry some form of GAP coverage as a condition of the loan. With GAP coverage, you won't be financially responsible for the remaining loan amount if your vehicle gets totaled and its actual cash value isn't enough to cover the loan.

The downside of GAP coverage is that it adds an extra expense to your auto loan. Most auto lenders charge between $500 and $700 for GAP coverage, not including the interest accrued on that amount if the cost of your GAP coverage is rolled into the loan. Purchasing GAP insurance through your insurance provider may be a cheaper option, with most agencies charging 5 to 6 percent of your collision and comprehensive coverage for GAP insurance.

Can You Opt Out of It?

As mentioned earlier, most vehicle financing contracts require you to carry GAP coverage, whether you decide to stick with the provider chosen by your lender or opt to purchase your own coverage. Choosing your own GAP provider can sometimes be more affordable than relying on your lender's chosen provider. As for opting out of GAP coverage completely, there are only a few scenarios where you'll want to forego that coverage:

• If your loan comes with a GAP waiver instead of GAP insurance. While GAP insurance actually pays out the difference between the remaining loan amount and the car's actual value, a GAP waiver allows that difference to be forgiven completely.
• If your vehicle is already several years old. Older vehicles nearing the bottom of the depreciation curve won't benefit from GAP, since the difference between the loan amount and the vehicle's actual value is relatively minor.
• If your vehicle's actual value is higher than the original loan amount. It doesn't happen often, but in cases where the vehicle is somehow worth more than the loan amount, GAP insurance is usually unnecessary.

Going without GAP coverage may save you money in the short term, but it can also expose you to significant financial penalties if your vehicle is wrecked and the insurance payout fails to cover the entire value of the loan. For more information, contact a business such as Able Insurance Agency.