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Gap coverage protects you from repaying your car loan or lease if your car is totaled.

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Gap insurance can help protect drivers who are making car payments. It covers you if your car is stolen or totaled and you owe more on a loan than your car is worth. If you get into an accident and the car is written off, your insurance might not pay enough to cover the value of the car and the remaining portion of the loan without gap insurance.

What does gap insurance cover?

When you buy a car, it immediately starts depreciating. Here’s the issue: If your car is stolen or totaled, your insurer will pay only what the vehicle is worth. This amount will typically be the market value of the car at the time of the accident plus the amount left owing on your car loan. Meanwhile, you’re still stuck paying back your entire loan.

This creates a gap between how much money you receive from your insurer and what you still owe to your bank. Say you took out a car loan and bought a car for $20,000, and then your car is stolen shortly after. Your insurer may pay you $15,000 for your stolen car’s value, but you might owe $20,000 in loans. Gap coverage would pay for the difference of $5,000.

If you didn’t have gap coverage, you’d owe the bank $5,000 on a car you no longer have. With your $15,000 payout, you’d be able to pay back part of the loan, but you’d still be paying back $5,000 on a car you no longer drive. You might need to downgrade to a cheaper used car you can afford or go without a ride until you can save up for another car.

The exception is if you have an agreed value car insurance policy, in which case your car insurance will pay that amount instead of the market value at the time of the accident.

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Is gap insurance worth it?

It’s a terrible feeling when you still have to pay for a car you don’t have anymore. Gap insurance can help you avoid that scenario. The biggest benefit to gap insurance is that it covers you if you still owe a large amount on your car loan.

New cars especially are at risk, since your new ride will depreciate significantly as soon as you drive it off the dealer’s lot. And if you need a car for work 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:

  • Only put a small down payment on your vehicle
  • Took out a loan with repayment terms of 60 months or longer
  • Leased your vehicle
  • Have a high value car that depreciates quickly
  • Buy a new car
  • Need your car for work and want to know you’ll be able to afford a replacement if something happens
  • Know your car’s value is higher than the expected payout (has expensive modifications, etc.)

When should I skip gap insurance?

You generally won’t need gap insurance if you have no car loan or will pay off your car soon. You can also skip gap insurance if you know you can afford any losses.

Watch out for certain car loans that might disqualify you from gap insurance.

  • You bought your car outright
  • You put down a down payment of 20% or more
  • Your policy uses your car’s agreed value instead of market value
  • Your loan has an interest rate over 10% or high balloon payments or you have an unsecured personal loan

How much does gap insurance cost?

Gap insurance usually costs $20 to $30 a year. You typically only need it for a few years while you pay back your loan.

Talk to your current auto insurer for a better price or shop around for the best deal. Your car dealer will offer gap insurance, but it will often be very expensive.

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Does gap insurance come with a deductible?

No, gap insurance usually doesn’t come with a deductible. In some cases, it can actually pay for your collision or comprehensive coverage deductible.

Case study: John’s accident

John bought a new $10,000 car using a car loan provided by his dealer. The terms of his loan states he needs to repay a total of $11,000 to the dealer. He insured the new car at market value with a comprehensive car insurance policy. The moment he drives it off the lot, his new car turns into a second-hand car and is now worth only $9,000.

Immediately after this, John gets into an accident and completely totals his new car. Fortunately, he had comprehensive car insurance. He makes a claim and gets reimbursed for the total market value of the car, which is $9,000. Now he has no car and still owes his car dealer $2,000.

John uses his car gap insurance to cover the $2,000 he needs to pay the remainder of his loan. Without gap insurance, he would have no car and be $2,000 in debt.

Bottom line

Gap insurance can keep you from paying an arm and a leg if you lose your car. To save money, make sure you compare the best rates with an online insurance comparison tool and avoid the expensive option from your car dealer.

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Frequently asked questions about gap insurance

Learn more about gap insurance

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