GAP waiver

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GAP waiver is a type of guaranteed auto protection. The waiver part of GAP waiver is the direct arrangement or agreement between borrower and finance company. GAP waiver is designed to protect a borrower from a large unexpected unscheduled immediately due monetary amount demanded by finance company after the total loss of a vehicle where such vehicle has an outstanding financial obligation. In other words; someone has a serious accident, the appraiser deems it cost effective to replace rather than repair your vehicle, and they determine actual cash value ("ACV") on such replacement minus deductible ("DED" if applicable) to be less than what is owed to finance company by the borrower.

Finance companies refer to this as the loan or lease deficiency. This deficiency is immediately due upon demand of the finance company unless the GAP waiver (or GAP insurance) is purchased. GAP waiver is direct deficiency or debt forgiveness by a finance company. Although GAP waiver and GAP insurance appear to have the same end result, they are differentiated by who can offer it. GAP waiver is offered directly to a borrower by a finance company. Any other offering or way would be GAP insurance as it carries third party indemnification. In other words, GAP insurance and GAP waivers are conceptually different. With a GAP waiver, the lender agrees to extinguish the borrower's financial contractual obligation under terms of the loan/lease. With GAP insurance, the contractual obligation remains but it is paid for by the insurer on the borrower's behalf. From a borrower's perspective, the net effect is not technically the same.

In some states, this optional automotive finance product is offered as GAP waiver, in others as GAP insurance. This is defined by each state regulations, not by dealership or insurance company election. In California, for example, GAP insurance is limited to a percentage of wholesale Book, while GAP waiver is not; this may make a significant difference in coverage. If for example, a lease or loan has a balance of $30,000 and the Book value of the vehicle is $20,000, the GAP would be $10,000, the GAP insurance would only cover 5% of the $20,000 which would mean only $1,000 in coverage, while the GAP waiver would cover the entire $10,000 gap.

Source of article : Wikipedia