What do Gap Insurance Regulations Serve to do?

GAP Insurance is available for people who need to fill in the "gaps" of their current auto insurance. GAP insurance is a supplemental option that can be purchased to protect yourself from the difference between your insurance payment and the actual payoff of a vehicle. GAP insurance is very helpful when you have an accident that results in a complete total of your vehicle because if you still have a large outstanding balance it will take care of it.

Debt Cancellation Agreement

One of the largest benefits of GAP insurance is the power of the debt cancellation. This type of agreement is actually a requirement of the Federal Government. Regulation Z is the agreement that the government added as a type of finance charge for the debt cancellation fees. This means that the premium for your GAP coverage can be used as a finance charge.

How GAP Insurance Works

When you buy a car, the car's actual value will decrease more than the rate at which you pay off the loan. In a few years, you car's value could drop by 50%, while you have only paid off about 20% of your loan. If you are involved in an accident and the insurance company makes the decision to total out the car, you are still required to pay back the loan. The insurance company will only pay for the value of the car, not the amount you owe.

This is where the Regulation Z for the GAP helps cover the rest of the amount that is owed on the vehicle. With the coverage, you are no longer liable. In some cases this can be several thousands of dollars.

Leasing vs. Financing

Many leasing companies will require that you have a GAP insurance policy. Some leasing companies will have this as part of their agreement. Review your contract to see if you will be required to purchase this policy or if it is already built into the monthly price. If not, you can get GAP insurance at any insurance agency. Most of the time, buying insurance with an insurance agency will provide a better price.


There are a few regulations concerning GAP insurance that are both on state and federal levels.

  • Truth in Lending Act - This act simply states that the GAP insurance is voluntary and specifies when the finance charges can be excluded.
  • State Standards - When a dealer sells GAP insurance to its customers it has to do so through an insurance agent. The policy must also meet stringent state requirements.
  • Binding Arbitration - This is a case of the company that issues the policy cannot be sued by the policy holder.
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