Gap Insurance: what does it mean in Canadian car loans?

Gap Insurance, also known as Guaranteed Asset Protection (GAP), is an optional financial product offered in Canada designed to cover the difference, or "gap," between your vehicle's actual cash value (ACV) as determined by your primary auto insurer and the outstanding balance of your car loan, should the vehicle be declared a total loss due to theft or an accident. This coverage is particularly relevant in the Canadian market, where new vehicles experience rapid depreciation, often losing a significant portion of their value in the first few years. With prevailing market conditions, including higher vehicle prices and longer financing terms extending into 2025, it's common for the loan balance to exceed the vehicle's market value for an extended period.

For borrowers, this matters immensely because without GAP insurance, if your vehicle is written off or stolen, your primary insurer will only pay out its depreciated market value. This payout is frequently less than what you still owe on your loan, leaving you personally liable for the remaining debt on a vehicle you no longer possess. When considering GAP insurance, borrowers must demand clear disclosure of the total cost, which is often rolled into the car loan, meaning you pay interest on the premium itself over the loan's duration. Additionally, provincial sales taxes (PST or HST, depending on the province) will apply to the GAP insurance premium, further increasing the overall expense. It is crucial to understand the full financial commitment, including all associated costs and the specific terms and exclusions of the policy, to make an informed decision and avoid unexpected financial burdens.