Is Car GAP Insurance Worth It?

Find out about car GAP insurance and if it’s suitable for you.
Published on December 3rd, 2020
  Written by 
Adrian Edlington
Adrian Edlington is PR & Communications Manager at Savvy. With a keen interest in personal finance, car loans, the mortgage industry, cost of living pressures, electric vehicles and renewable technology, Adrian's research includes conducting primary data surveys and analysis of up-to-the-minute secondary Australian data sources. His work on behalf of Savvy has been featured on ABC.net.au The Conversation, the Sydney Morning Herald, AFR, News.com.au, The Age, Herald Sun, Adelaide Now, SBS On The Money, 7News, Car Expert, Which Car, Drive.com.au and more. In his spare time, Adrian enjoys mountain biking and business podcasts.
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   Reviewed by 
Bill Tsouvalas


Bill Tsouvalas
Bill Tsouvalas is the managing director and a key company spokesperson at Savvy. As a personal finance expert, he often shares his insights on a range of topics, being featured on leading news outlets including News Corp publications such as the Daily Telegraph and Herald Sun, Fairfax Media publications such as the Australian Financial Review, the Seven Network and more. Bill has over 15 years of experience working in the finance industry and founded Savvy in 2010 with a vision to provide affordable and accessible finance options to all Australians. He has built Savvy from a small asset finance brokerage into a financial comparison website which now attracts close to 2 million Aussies per year and was included in the BRW’s Fast 100 in 2015 as one of the fastest-growing companies in the country. He’s passionate about helping Australians make financially savvy decisions and reviews content across the brand to ensure its accuracy. You can follow Bill on LinkedIn.
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Navigating the world of car ownership involves more than just choosing the right car. Understanding and managing the financial risks associated with your vehicle is crucial. One such risk arises from the potential gap between the market value of your car and the outstanding loan balance in the event of a total loss, like theft or an accident. This is where GAP (Guaranteed Asset Protection) insurance steps in. This type of insurance can offer protection in difficult situations – but is it worth it? Join us as we examine what GAP insurance is, its benefits and drawbacks and key considerations to help you make an informed decision.

What is GAP insurance?

Gap insurance is a specialised form of coverage designed to address the financial gap that may arise between the outstanding balance on a car loan and the cash value of the vehicle in the event of a total loss. Specifically tailored for individuals with car loans, gap insurance provides a crucial safety net in scenarios where the insurance payout falls short of covering the remaining loan balance, ensuring that borrowers are not left financially vulnerable due to unforeseen circumstances such as theft or severe accidents.

How does GAP insurance work?

When you take out car insurance, your car is usually valued at its current market rate, known as its market value. This is the amount you will receive if your car is deemed a total loss. While a car’s value depreciates over time, the outstanding balance on the car loan may not decrease at the same rate. Therefore, in the event of a total loss, the insurance payout may be lower than the remaining balance on your loan. Gap insurance steps in to cover this difference, ensuring that you're not left with a substantial loan balance for a car that's no longer usable.

Take this scenario:

You purchase a new car for $30,000 and finance the entire amount with a loan. After two years, your loan balance is $25,000, but due to depreciation, the market value of your car is now $20,000.

Without GAP insurance: If your car is totalled in an accident, your comprehensive car insurance will only pay out the current market value, which is $20,000 in this example. This leaves you with a remaining loan balance of $5,000 that you'll still be responsible for paying, even though your car is gone.

With GAP insurance: GAP insurance would cover the difference between the market value ($20,000) paid out by your comprehensive car insurance and the outstanding loan balance ($25,000). In this scenario, GAP insurance would provide you with $5,000, effectively bridging the gap and helping you avoid out-of-pocket expenses for a car you no longer possess.

It's important to note that GAP insurance doesn't replace comprehensive car insurance. It's a separate policy that works in conjunction with your existing comprehensive coverage to provide additional financial protection in specific situations.

What are the benefits of GAP insurance?

GAP insurance offers several potential benefits for Australian car buyers who are financing their vehicles:

  • Financial protection: GAP insurance provides financial security by covering the difference between the outstanding balance on your car loan and the market value of your vehicle if it is written off. This prevents you from having to pay out of pocket for a car you no longer have.
  • Peace of mind: knowing that you're protected against potential financial losses due to theft, accidents or other unforeseen circumstances can offer peace of mind, allowing you to enjoy your car ownership experience without worrying about unexpected expenses.
  • Cost-effective: considering the relatively low cost of GAP insurance compared to the potential financial burden it can help you avoid, it's often seen as a cost-effective investment for car owners, especially those with high-interest loans or long-term financing plans.
  • Protects against unexpected depreciation: cars can depreciate quickly, creating a larger gap between the market value and the loan balance. GAP insurance ensures you're not left responsible for the difference even if the car's value drops significantly.

What are the potential drawbacks of GAP insurance?

While GAP insurance offers valuable protection for car loans, it's important to be aware of its potential drawbacks:

  • Cost: GAP insurance adds an additional cost to your car ownership expenses, usually paid as a one-time premium upfront or included in your car loan payments. This cost can vary depending on the car's value, loan amount and the specific GAP policy you choose.
  • Limited coverage: GAP insurance only applies in the event of a total loss. It doesn't cover partial damage repairs or other unforeseen expenses associated with car ownership and doesn’t replace other types of car insurance.
  • Potential redundancy: depending on your loan terms and the depreciation rate of your car, the gap between the market value and the loan balance might naturally decrease over time, potentially rendering GAP insurance less necessary in the later years of your loan.
  • Potential for overlap: in some cases, comprehensive car insurance may already offer limited gap coverage. It's crucial to check your existing car insurance policy carefully to understand if it includes any gap coverage before purchasing additional GAP insurance.

Is GAP insurance worth it?

Before deciding whether GAP insurance is right for you, consider these key factors:

  • Your loan-to-value ratio (LTV): a higher LTV ratio indicates a larger gap between the loan balance and the car's value, making GAP insurance potentially more beneficial.
  • The depreciation rate of your car: cars with a faster depreciation rate are more likely to experience a significant gap, increasing the potential value of GAP insurance.
  • The length of your loan term: longer loan terms can lead to a larger potential gap, especially in the initial years, making GAP insurance a consideration.
  • Your personal risk tolerance: if you're uncomfortable with the potential financial burden of a gap in the event of a total loss, GAP insurance can offer peace of mind.

GAP insurance may be especially suitable if you have:

  • Financed a significant portion of the car: the larger the gap between the loan balance and the car's market value, the greater the potential financial benefit of GAP insurance.
  • Purchased a new car: new cars experience rapid depreciation in the initial years of ownership, making the gap between market value and loan balance potentially larger.
  • Leased a car: most lease agreements require you to pay the difference between the car's residual value and the market value if the car is totalled. GAP insurance can help cover this gap specifically for your lease agreement.
  • Plan to keep the car for a shorter period: the shorter you own the car, the larger the potential gap between the loan balance and the market value.

Ultimately, the decision to purchase GAP insurance in Australia is a personal one that depends on your individual circumstances and needs.

What are the alternatives to GAP insurance?

While GAP insurance offers protection against the financial gap in a total loss scenario, it's not the only option for car loan borrowers. Here are some potential alternatives to consider:

  • Increase your down payment: making a larger down payment when purchasing your car reduces the initial loan amount and minimises the potential gap between the market value and the remaining loan balance in the event of a total loss.
  • Save for a separate emergency fund: instead of relying on GAP insurance, you could set aside a portion of your budget each month to build a dedicated emergency fund. This fund could then be used to cover the gap between the insurance payout and the remaining loan balance if your car is totalled in an accident or stolen.
  • Research loan options with GAP coverage: some lenders offer car loans that already include GAP coverage as part of the loan package. This can be a convenient option as the cost of GAP insurance is rolled into your monthly loan payments, potentially simplifying your budgeting. However, it's crucial to compare the cost of GAP coverage offered by different lenders to ensure you're getting a competitive rate before committing to this option.

GAP insurance can help car loan borrowers to safeguard themselves against potential financial risks in the event of a total loss. However, while it offers valuable protection, its worth depends on individual circumstances and needs. By weighing up the benefits and drawbacks and considering alternatives, you can make an informed decision about whether GAP insurance is right for you.

If you are looking for an affordable car loan, Savvy's comparison service offers a convenient way to compare various loan offers from different lenders, ensuring you secure competitive rates and terms suited to your needs. Visit Savvy today to start your car loan journey.

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This guide provides general information and does not consider your individual needs, finances or objectives. We do not make any recommendation or suggestion about which product is best for you based on your specific situation and we do not compare all companies in the market, or all products offered by all companies. It’s always important to consider whether professional financial, legal or taxation advice is appropriate for you before choosing or purchasing a financial product.

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