One of the problems with a zero-down auto loan is the high initial balance on the contract. This means that for a period of time, Illinois drivers may owe more on their new purchase than the actual market value. When a new car is driven off the dealership lot its value automatically decreases by as much as eight percent. Guaranteed Auto Protection, sometimes abbreviated as GAP, is a way to make sure the loan is paid in full should the car be totally destroyed in an accident, stolen and never recovered, or damaged beyond repair by fire or flood.
How GAP Insurance WorksUntil recently there were only a few insurance providers offering GAP insurance in Illinois. But over the past decade, many automakers and dealers have been offering loans with very little or no money down for the most qualified buyers. The loan contract will of course require the new owner to purchase collision and comprehensive insurance in case the vehicle is damaged severely in an accident or by an act of nature. This gives the lender assurance that the investment will be covered in case the owner can no longer afford to make monthly payments.
If a car is purchased for $20,000 and there is no down payment made, the new owner immediately finds him or herself in an upside-down loan. The loan balance of $20,000 exceeds the fair market value of the car, which is probably around $18,500 the instant it leaves the dealership. The market value may be even less if the car was purchased toward the end of the current model year. If the car is totally destroyed in an accident caused by the insured, or is stolen and never recovered, the deductible chosen by the policyholder will be paid first. If the car's value is deemed by the insurance company to be $18,500 and the insured is carrying a $1,000 deductible on collision and comprehensive insurance, the provider will pay no more than $17,500 to the lender. This leaves a gap of $2,500 that must be paid by the vehicle owner. GAP insurance can be purchased to cover the difference.
Adding GAP Insurance To The PolicyMost insurance companies and even some dealerships in Illinois will ask the new vehicle owner if he or she wants GAP insurance. This type of coverage is temporary and will be dropped after about six or eight payments have been made on the vehicle loan. Once the car's value is equal to or greater than the loan balance, owners need not carry this insurance. The average price for GAP insurance is approximately two percent of the loan balance. A brand new car with a $20,000 loan attached may cost the driver about $400 for GAP protection.
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