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Car totaled or stolen? All coverage doesn't pay equally

Gap insurance can make sense, especially if the loan balance exceeds the car value.

Person breaking into a car

As almost everyone knows, the moment you drive your new car home, it begins to lose value — very quickly in some cases. But if you are ever unfortunate enough to experience a total loss due to accident or theft, most standard insurance policies pay the actual cash value of the car at the time of the incident.

That means if you still owe more on your loan, you'll be on the hook to pay it.

If you financed your car through the dealer, you may have been offered "GAP insurance" as part of a range of options provided when you buy the car. Although they must by law fully explain it, there's still a lot of misinformation about GAP (Guaranteed Asset Protection) insurance, which is often now included in many full-featured auto insurance policies.

Here's the scoop

Let's say you buy a $40,000 car. Two years later, you're in an accident, and your car is declared a total loss by your insurance carrier.

The market value of your car at this point is $22,000, yet you still owe $26,000 on your loan. That $4,000 GAP is money you would still owe your lender, so GAP insurance pays off that difference.

GAP insurance may make sense under some conditions, especially those where the loan balance is likely to exceed the depreciated car value for most or all of the loan term. This might be the case in the following situations:

  • You've made a down payment of 20% or less, so the depreciated value will be less than the loan amount still due for most of the loan.
  • You've financed your car for a relatively long period of time, such as 60 months or more, so in later months when the car is worth much less than at the time of purchase you still have a significant loan balance.
  • You've bought a new car that has a record of depreciating quickly so your payments don't reduce the loan as fast as the declining value of the car.

Most dealers — and some banks — offer some type of GAP insurance as part of the vehicle loan, but rates and coverage can vary considerably. Be sure to figure out the total cost and read the fine print, as it can add a significant amount to your monthly payment.

State Farm Bank® offers Payoff Protector®footnote [1] for vehicle secured loans. Payoff Protector will release the borrower from the obligation to pay the difference between the amount paid by any insurance company for a total loss of the collateral and the scheduled unpaid principal balance due on the vehicle loan account held with State Farm Bank.

Though similar in some respects to Guaranteed Asset Protection (GAP), Payoff Protector is not equivalent to GAP. Payoff Protector is a provision within the loan agreement whereby State Farm Bank agrees to cancel the customer’s remaining unpaid principal balance due after application of collateral insurance coverage in the event of a total loss.  Payoff Protector is not an insurance product, and is subject to the terms, conditions, and restrictions of the Payoff Protector provision in the State Farm Bank Promissory Note and Security Agreement. No additional signatures are required for Payoff Protector.   

For more information on Payoff Protector, contact your State Farm® Agent or State Farm Bank at  877-SF4-BANK (877-734-2265).

return to reference[1] Payoff Protector is not an insurance product. Subject to the terms, conditions, and restrictions of the Payoff Protector provision in your State Farm Bank Promissory Note and Security Agreement. If your vehicle is determined to be a total loss before the loan is paid off, State Farm Bank will cancel the difference between the insurance payout and the unpaid principal balance due on the loan. Certain restrictions apply. For example, your loan must be in good standing.

State Farm Bank, F.S.B., Bloomington, Illinois ("Bank"), is a Member FDIC and Equal Housing Lender. NMLS ID 139716. The other products offered by affiliate companies of State Farm Bank are not FDIC insured, not a State Farm Bank obligation or guaranteed by State Farm Bank, and may be subject to investment risk, including possible loss of principal invested.

The information in this article was obtained from various sources not associated with State Farm® (including State Farm Mutual Automobile Insurance Company and its subsidiaries and affiliates). While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. State Farm is not responsible for, and does not endorse or approve, either implicitly or explicitly, the content of any third party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. State Farm makes no guarantees of results from use of this information.

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