Guaranteed Asset Protection (GAP)

Meaning and Definition

Guaranteed Asset Protection (GAP) is an optional insurance product designed to cover the financial gap between the outstanding balance on a car loan or lease and the actual cash value of the vehicle in the event of theft, total loss, or write-off. It provides additional protection to borrowers by ensuring that they are not left with a significant financial shortfall if their vehicle is deemed a total loss and the insurance payout is insufficient to cover the remaining loan or lease balance.

Why it is important to know

GAP insurance is important for borrowers as it offers financial protection and peace of mind in situations where the vehicle is declared a total loss. Standard comprehensive car insurance policies typically reimburse the actual cash value of the vehicle, which may be less than the outstanding loan or lease balance. GAP insurance helps bridge this gap, preventing borrowers from being financially responsible for the remaining debt on the vehicle.

Example in car finance

Suppose a borrower purchases a car through a finance agreement and takes out GAP insurance. Unfortunately, a few months later, the car is involved in a severe accident and declared a total loss by the insurance company. The insurance payout covers the actual cash value of the vehicle, which is lower than the outstanding balance on the car finance agreement. In this case, the GAP insurance policy would cover the difference between the insurance payout and the remaining loan balance, ensuring that the borrower is not left with a significant financial burden.