If I crash my car, will my auto loan be covered?

Car crash
If a driver crashes their car, their auto loan will be covered, but only if they have GAP insurance.

Basic car insurance protects the owner’s investment in the car, but it does not extend to the cost of the auto loan. GAP insurance, or guaranteed auto protection, covers the monetary difference between the car’s actual cash value (ACV) and the amount owed on the auto loan or lease.

If a driver’s car is stolen or wrecked, regular insurance will only cover the cost to fix or replace the vehicle based on current market values. It will not cover what the owner owes to the auto loan lender. The owner could get reimbursed for a $10,000 car, but still owe $12,500 to the auto lender. GAP insurance would fill the $2,500 void.

This insurance protects drivers in multiple ways. The insurance protects a car’s value if it is stolen or damaged, but it also reduces the financial damage caused by depreciation values, according to Jeff Bushman, an insurance agent who specializes in business and life insurance policies.

Borrowers with small down payments on their vehicle can benefit from GAP insurance because the vehicle could depreciate faster than the borrower repays their debt.

“Since a car depreciates at a speed that’s faster than the amount owed on the loan decreases, there can be a gap that will cause the individual to owe money on a car that he/she no longer has,” Bushman said.

Kristofer Kirchen, president of Tampa-based, Advanced Insurance Managers, said that on a five-year new car loan, borrowers will not reach a break-even point until roughly their third year of owning the vehicle. In other words, borrowers are upside down on their loan for three years.

“GAP is a good idea if you are concerned about the vehicle being totaled prior to ACV and your loan balance reaching parity,” Kirchen said.

GAP insurance is usually an optional policy although many lenders offer it on their auto loan applications. Some auto lenders require GAP insurance coverage when consumers apply for a new auto loan. Borrowers should review their paperwork thoroughly before adding this insurance to their policy because it could already be a part of their package. Similarly, it could be absent on the policy when an owner otherwise thinks they’re automatically covered.

Many auto loan borrowers do not realize that their policy is lacking GAP insurance until after they experience a loss, Kirchen said.

Despite the multiple positive features, GAP insurance does have a few cons and precautions to consider. First, borrower will face a higher premium. The one-time cost varies from company to company but it will likely be several hundred dollars. That premium is determined by the auto loan amount and not by the borrower’s driving history or credit score.

Shane Fisher, a personal injury and criminal defense attorney, said that a good cost estimator for GAP insurance is one to two monthly car payments.

Since it is not required, many consumers refuse to purchase the coverage because of the cost.

“Most people are hesitant to spend additional money for a car when they’ve already put a lot of money into purchasing one,” Fisher said.

Secondly, drivers should ensure that their other auto insurance policy is up-to-date as well, including collision coverage. Without this added protection, some GAP insurance policies might not be honored.

Finally, despite its ability to protect consumers from the uncertainty of a car’s market value, GAP insurance is not available to all owners. Bushman said it is not available for older vehicles because it would place an added cost on the insurance company.

“Because the older car is worth less every day, and the value determines whether the company will pay the value or pay to have it fixed, they don’t want to be stuck with paying more money for a car that’s low enough in value that it doesn’t pay to fix,” he said.