Guaranteed Asset Protection (GAP) insurance is an optional financial product designed to protect Canadian consumers from a significant financial shortfall if their financed or leased vehicle is declared a total loss due to an accident, theft, or fire. Standard auto insurance policies typically only pay out the Actual Cash Value (ACV) of the vehicle at the time of the loss, which accounts for depreciation.
Given the rapid depreciation of new vehicles and the prevalence of longer loan terms (e.g., 72-96 months) in the Canadian market, especially with current interest rates influencing affordability into 2025, it's very common for the outstanding loan or lease balance to exceed the vehicle's ACV. This 'negative equity,' often thousands of dollars, would otherwise be the consumer's responsibility, leaving them to pay off a vehicle they no longer own while simultaneously needing to finance a replacement.
GAP insurance bridges this difference, covering the amount between the insurer's payout and your remaining debt, up to the policy limits. It's particularly relevant for those with small down payments, who have rolled negative equity from a trade-in, or who have financed for extended periods, providing crucial peace of mind and preventing a substantial financial burden.