GAP insurance stands for Guaranteed Auto Protection. It is not really a cover for the auto but the loan taken out to buy it. It is usually required by the lender to be taken out just in case your automobile is totalled and your loan is bigger than what the insurance company would pay for the vehicle. In contrast with what some people might believe auto insurers cannot care less how much loan you have on it when they determine the amount they will pay.
When a vehicle is totalled companies look at its open market value to determine the claim payment. They take the average of the prices of similar cars currently on sale in the market. They may make slight adjustments because yours is low mileage, well looked after or have save improvements done. Nonetheless, the amount may not be enough to cover the outstanding loan and this is not their problem at all.
That is why it is essential that you buy GAP insurance to cover the shortfall between the loan and what the insurer would pay. This coverage is highly necessary for new cars as they stand to lose their value faster. First couple of years are the period automobiles lose the most value. It is normal for a new car to lose at least 10% of its value as soon as you bring it home. Otherwise, why would anyone buy a new car from you instead of the dealer with the new car smell and plastic covers are still on?
You can buy this coverage for used cars as well. The criteria is the risk of being upside-down on your loan and covering for this risk. If a second hand auto dealer does not offer it you can contact your insurer and ask for it to be added onto your policy. Some leasing companies may include the cost of this insurance in the monthly payments automatically. You should check with them first when leasing.
Usually insurers would allow up to two years for this coverage to be added. It may be the case that people offer their cars as security even though they bought it cash. Also, owners can cancel the cover when they pay off the loan or there is a very little chance of being upside-down on the loan. In the latter case, you may need the permission of the loan provider.
After a few years if you still owe money on the car it may be sensible to pay it off. When the value of the vehicle is depreciated far enough many people drop some of the coverage like collision, comprehensive and GAP insurance. That is why you may have to pay the lender back and be clear of the debt to be able to drop such covers.
Most companies will insisted on full auto coverage to be kept during the entirety of the loan agreement. The savings you will get by dropping some coverage for an old automobile can sometimes be bigger than the remainder of the loan.