In the event of a total loss of a vehicle, what type of contract ensures a borrower’s debt is canceled up to the amount of insurance received?

A Guaranteed Auto Protection (GAP) contract is specifically designed to protect borrowers in the event of a total loss of a vehicle, such as in an accident or theft. When a vehicle is totaled, insurance typically covers the actual cash value of the vehicle at the time of the loss. However, if the borrower owes more on the auto loan than the insurance payout, they can face a financial shortfall.

The GAP contract steps in to cover this difference, ensuring the borrower’s debt is canceled up to the amount received from the insurance. This provides peace of mind to the borrower, knowing they won’t be responsible for paying off a loan balance that exceeds the insurance settlement.

In contrast, a standard vehicle loan agreement simply outlines the terms of borrowing but does not include any provisions for debt cancellation in the event of a total loss. A leasing agreement pertains to the rental of the vehicle rather than ownership, and a home equity line of credit has no relation to vehicle financing. Therefore, the GAP contract is the only option that directly addresses the concern of having debt canceled when a vehicle is declared a total loss.