Cost Management

Gap Insurance More Important as Used Vehicle Prices Decline

November 21, 2022

During the supply chain crisis, the cost of used vehicles increased significantly, and premiums were paid to acquire vehicles. Vehicles in many cases became appreciating assets. However, that unique environment is changing. Used vehicle values have finally leveled off and are starting to decline in value. 

According to Cox Automotive Chief Economist Jonathan Smoke, “2022 has been the year of giving back some of the big 2021 increases when it comes to wholesale used-vehicle values.” Smoke said “Vehicles are once again depreciating assets. As we look at the cumulative declines this year, we are down significantly and now expect to finish the year down nearly 14% in December.”

While spending on used vehicles has not collapsed and retail prices have not seen significant declines in value, surging interest rates, high inflation and stock market volatility has created more uncertainty in the market and could impact prices.

Because values are declining, now it is more important than ever to consider GAP insurance to cover the difference in current value and the amount you still owe on the loan or lease. GAP insurance kicks in when you are “upside down” on your lease or loan. 

Gap insurance is designed to help offset this risk and is an optional bridge in coverage for situations where more is owed on a vehicle than it is worth. It isn’t something that can be purchased at any point though and is often required to be purchased within a year of the initial purchase. 

Gap insurance covers the difference between what is owed on the vehicle and the market value of the vehicle in the event of a total loss. It is not uncommon in the early years of a lease or loan for a vehicle to be worth less than its loan or lease payoff balance. If the vehicle is totaled, comprehensive or collision insurance reimbursement is based on the vehicles cash value NOT the loan balance. If you are “upside down”, meaning the payoff balance is greater than the vehicles cash value, you could end up paying a significant amount to cover the difference.

There are many factors that impact the value of vehicles and this potential gap. 

  • Number of miles driven each year
  • Type of vehicle – some depreciate faster than others
  • Was there a down payment?
  • Term of the lease
  • Unique or expensive upfitting
  • Premium paid for the vehicle due to the pandemic/supply chain issues

Until vehicle prices, supply and demand stabilize, Gap insurance is highly recommended to protect against losses that can arise when the compensation received from a total loss does not fully cover the amount the insured owes on the vehicle’s financing or lease agreements.