Gap insurance (guaranteed asset protection or guaranteed auto protection) protects your car loan or lease if your car’s totaled. With a car loan, you’re paying for a brand new car that depreciates the minute you drive it off the lot. And if your car is stolen or totaled, car insurance only covers the actual value of your car, not the total amount of your car loan. Gap insurance protects you for the amount, or gap, left on your car loan.
How does gap insurance work?
You might own more on your car loan than your car is worth. Gap insurance will pay for the full value of your car so you don’t have to pay off your loan out of pocket.
- Say you took out a car loan and bought a car for $20,000. Then your car is stolen a year later.
- Your insurer pays you $15,000 for your stolen car’s value, which is what it’s worth at the time it was stolen.
- Let’s say at this time you still owe $18,000 on your car loan. Your insurance payout of $15,000 wasn’t enough to pay off the rest of your loan.
- Gap coverage would pay for the difference of $3,000 to cover the rest of your loan.
- If you didn’t have gap coverage, you’d owe the bank $3,000 on a car you no longer have.
Is gap insurance worth it?
The biggest benefit to gap insurance is that it covers you if you still owe a large amount on your car loan.
New cars are especially at risk for the first few years, since your new ride will depreciate significantly as soon as you drive it off the dealer’s lot. And if you need a car and end up with an outstanding debt after an accident, you could find it much harder to get the financing needed for a replacement vehicle.
Consider buying gap insurance if you:
- You bought or leased a new car.
- Your car loan has repayment terms of 60 months or longer.
- You haven’t paid down your car’s current value on the loan.
- You put a small down payment or no down payment on your vehicle.
- You bought a high value car that depreciates quickly.
- You need your car for transportation and have no backup ride.
- You rolled over an old car loan into your new loan.
When should I skip gap insurance?
You don’t need gap insurance if you have no car loan or lease. You can generally skip gap insurance if your car loan is close to its current value, you’re close to paying off your loan or you know you can afford any losses.
- You bought your car outright without any financing.
- You set a down payment of 20% or more on your car loan.
- You paid down your car loan to its current value.
- You could afford another car if yours was totaled.
- Your policy uses your car’s agreed value instead of market value.