Gap insurance, also called guaranteed asset protection, protects your car loan or lease if your car is totaled or stolen while you’re making payments. The good news is that you can buy gap coverage for only a few bucks a month — as long as you don’t buy it from your car dealer.
How does gap insurance work?
Gap insurance protects you for the amount, or gap, left on your loan if your car is stolen or totaled in an accident. Some lenders require you to buy gap insurance, but check your loan contract to make sure. You can add gap insurance to your policy at any time, even after taking out your loan.
When financing a new car, you’re paying for a car that depreciates the minute you drive off the lot — all while chipping away monthly at your interest-gaining car loan. As a result, your car’s value can fall quickly below the amount you owe on your loan.
Since insurance only pays out your car’s market value if it gets totaled, you could be left paying off the rest of your car loan yourself with no car to show for it.
Gap coverage in action
New cars depreciate around 20% within a year of buying them, according to the Insurance Information Institute. Even though you might have a $40,000 auto loan, your new car’s actual cash value might be only $32,000 after driving off the lot.
If your car is stolen, you’d owe $8,000 on your loan, not including interest: $40,000 (original loan amount) – $32,000 (your car’s actual cash value) = $8,000.
Gap insurance pays off that extra $8,000 left on your loan. That means you’re getting thousands of dollars worth of protection for a mere $20 a year.
Does gap insurance always pay for a totaled car?
No. Gap insurance only pays for a totaled or stolen car if there’s a gap between what your car’s worth and what you owe on your loan.
If your car’s insurance payout is the same as what it’s worth, there won’t be a gap between your loan balance and insurance payout — so gap coverage doesn’t need to kick in.
Along with that, the standard car insurance exclusions apply to the claim. For example, if you damage your car intentionally, your claim would be denied.
How does gap coverage work for a leased car?
When getting a car lease, you make a small down payment and pay monthly to rent your car for several years. Gap insurance is probably worth buying for a leased car, and some leasing companies require it to protect their investment.
If your leased car is totaled without gap insurance, you’ll owe the remaining payments on your lease. And after driving the car for a year or two, the leased car will depreciate in value just like a new car would.
Is gap insurance worth it?
The biggest benefit to gap insurance is that it covers you if you owe more money on your car loan than your car is worth.
Consider buying gap insurance if:
You bought or leased a new car.
Your loan term is 60 months or longer.
You owe more than 50% of your car loan.
You made a small down payment.
Your high-value car depreciates quickly.
You drive your car every day.
You rolled over an old auto loan.
You won’t need gap insurance if:
You bought your car outright.
You’re close to paying off your loan.
You made a down payment of 20% or more.
You paid down the loan to your car’s current value.
You have an agreed value policy.
You can afford another car outright.
Check your car’s value to decide on gap insurance
You can check your car’s depreciation by price-checking online for an older model of the car you’re looking to buy. If the market price is vastly different from the new car price, your car’s depreciation will be high.
Keep in mind that new cars depreciate in value faster than older cars, so you may want to check on your specific car’s value to decide whether you need gap insurance.
How much is gap coverage?
Gap insurance costs about $20 a year or under $2 a month as an add-on to your car insurance policy, according to the III. You could pay $60 to $120 total if you keep it for three to six years while paying down your loan. Nearly every car insurer lets you buy gap coverage with a full coverage policy, which has both comprehensive and collision coverage. You’ll need both types of coverage for your car loan anyway.
Alternatively, buying gap coverage from a car dealership, bank or credit union can cost anywhere from $200 to $600 total, Edmunds reveals.
So, you’ll get the best deal on gap insurance as an add-on to your car insurance. Because it’s the same level of coverage as you’d get through insurance, there’s no reason to get gap coverage through your dealer or bank. And don’t let your dealer convince you that gap coverage is necessary to drive off the lot or for loan approval.
Ask an expert: When should I consider gap coverage?
A general auto insurance policy is designed to pay the lender the vehicle’s current cash value — not the current loan balance. The difference can be thousands of dollars. The average new vehicle loses 30% of its value the first year. By year three, that loss in value will be close to 50%. This is where gap insurance can help.
Consider this example: If your vehicle cost $25,000 new, your insurer would probably pay about $18,000 for a total loss during the first year. That’s a $7,000 shortfall. Depending on the amount of your down payment (or trade-in equity), you would still be responsible to your lender for the balance of the loan. If you have car gap insurance, your insurer pays the difference, not you.
While there is no one-size-fits-all answer regarding the need for gap insurance, you’re a likely candidate if you:
Lease a vehicle.
Finance for 60 months or more.
Put less than 20% down.
Roll negative equity from a previous vehicle loan into a new vehicle loan.
Drive more than the average 15,000 miles annually.
Purchase a vehicle with a history of high depreciation rates.
What to watch out for
Keep your eyes open to these pitfalls when buying gap insurance.
Missing exclusions. Check any exclusions listed in your policy that might prevent a payout. Damage caused by situations like impaired driving or illegal activities may not be covered.
Paying your insurance deductible. Gap insurance doesn’t come with a deductible itself, though you might pay the deductible for your collision or comprehensive coverage after filing your claim. Some companies do waive all or part of those deductibles as an added perk.
Requiring full coverage. Gap insurance may only be available if you have a policy with comprehensive and collision coverage. You’ll have to add gap coverage to your policy separately since it’s not included with full coverage.
Buying from a dealer. Unscrupulous car dealers might pocket your gap insurance payment without providing coverage, or require unreasonable exclusions.
Compare car insurance quotes with gap coverage
Bottom line
Gap insurance can keep you from still having to pay your car loan if your insurance claim doesn’t cover the full amount of your vehicle. Compare the best rates with an online insurance comparison tool and avoid the expensive option from your car dealer.
Roslyn McKenna Ayers is insurance manager at ValuePenguin and a former publisher at Finder, specializing in home and auto coverage. Her expertise and analysis has been featured on Bankrate, MSN and Reader's Digest. She holds a BA in writing and communications from Maryville College.
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