Auto Loan Skip-A-Pays May Be Bad for Your GAP Warranty

Most, if not all, loan officers will offer you a GAP warranty with your auto loan whether you are going to your financial institution or working with a dealership.  GAP Warranties pay what is owed on a vehicle loan at the time it is totaled in an accident.  GAP Warranties vary in price depending on where it is being offered. 

The price is not the only thing that varies for GAP Warranties but also features, stipulations, and benefits.  One stimulation that many borrowers overlook is how using skip-a-pay affects their GAP coverage.  Skip-a-pays are offered by financial institutions to borrowers who meet a set of criteria, usually based on the timeliness of payments.  If you pay on time, have not missed any payments, and your credit is good, you will most likely be offered the chance to skip-a-payment on your auto loan.  Most financial institutions offer these around the holidays.

Most borrowers realize that taking advantage of the skip-a-pay program means their loan will be extended.  Every month a skip-a-pay is utilized, a month is added to the loan.  The extension of the loan period will also incur additional interest, causing the borrower to pay more than originally planned.  Sure, financial institutions make more money with these offerings, but some borrowers think the advantage outweighs the cost. 

One disadvantage most borrowers either do not realize or ignore is how using skip-a-pays will affect their GAP Warranty if they total their vehicle.  For example, let’s say a borrower obtained a $10,000 vehicle loan and purchased the GAP Warranty offered at the time of the loan origination.  Then, for several years they take advantage of the skip-a-pay program their financial institution offers.  At that point, they get in an accident, and the vehicle is a total loss.  At the time of the accident, they owe $6,000 on their vehicle loan; however, if they had not used the skip-a-pay program their vehicle loan would have a balance of $4,500.  When they contact the company who issued the GAP Warranty, the company states they will only pay the $4,500 toward the loan.

This situation would cause a lot of frustration for the borrower.  The vehicle is a total loss; the GAP Warranty will only cover $4,500, and $1,500 remains due on the loan.  That $1,500 could go toward the purchase of a replacement vehicle.  Terri Larson with Coors Credit Union in Denver, Colorado, shared the following when asked the probability this could happen, “Each GAP contract maps out how many ‘skipped’ payments are covered in a deficiency.  For example, some credit unions have worked with CUNA GAP protection, which allows anywhere between 2 to 6 skipped payments – it depends on the program.”  In other words, if a GAP warranty allows for two skipped payments, but the borrower has four skipped payments, they will most likely owe money.

Ms. Larson also recommends purchasing GAP warranties through a credit union, where it is typically less expensive.  It certainly does hurt to shop financial institutions for rates, fees, and warranty coverage costs.  Remember, though, letting multiple financial institutions run a credit report can look like turndowns to the financial institution where you decide to obtain your loan.  Therefore, when shopping for a loan, ask for information and wait to have your credit report run until you are ready to obtain the loan.