GAP insurance is an optional car insurance coverage that assists in paying off your loan when:
- Your car is stolen or totaled
- The car’s depreciated value is less than the amount you still owe on the loan
Negative equity is when the outstanding balance of the current auto loan exceeds the estimated value of the vehicle.
The “gap” is that difference between the car’s depreciated value and your outstanding balance after your car insurance payout. Essentially, GAP insurance can help bail you out of an underwater car loan, so you don’t have that cost to worry about on top of figuring out how to purchase a new car.
Without GAP insurance, you’d have to either pay off the difference yourself out of pocket or roll it into a new car loan, which may not always be an option if you have bad credit.
Does GAP Insurance Cover Negative Equity?
Yes, GAP insurance will cover negative equity in most cases.
GAP insurance is intended to cover the leftover cost after an insurance payout in the case of a total loss or theft of a vehicle. But there are some situations where negative equity will not always be covered fully.
When GAP Insurance Does Cover Negative Equity
If you have a standard finance agreement for your car and the loan value was only going towards the purchase of that vehicle itself, your GAP insurance should cover any negative equity.
This prevents you from having to pay out of pocket in addition to having to find a new vehicle during a potentially stressful time.
When GAP Insurance Doesn’t Cover Negative Equity
GAP insurance may not cover your negative equity if it was rolled over from a previous car loan or if it is due to other factors that were financed into your car loan, aside from the vehicle itself.
There may be special policies available if you do want coverage for negative equity rolled over from a previous loan, however they would not likely be sold together or covered under the same agreement.
Should I Have GAP Insurance if My Car Has Negative Equity?
Like any insurance policy option, there are pros and cons to GAP insurance with negative equity.
Pros
- It can prevent you from having to pay out of pocket in the event of a total loss of your vehicle.
- It can allow you to start off with a clean slate for your next loan.
- It can give you peace of mind knowing you’re covered.
Cons
- It can be expensive, when you could be putting those funds towards paying down your negative equity.
- Hopefully, you’ll never experience a total loss or theft of a vehicle and won’t ever have to actually use it.
Ultimately, you’ll have to weigh the pros and cons for your individual situation to determine if GAP insurance is the right move for your negative equity car loan. It can help you avoid a tough situation and give you some additional security, but may not always be the best use of your hard earned money.