Should I Buy Gap Insurance for My Car?

You may want to buy guaranteed asset protection, more commonly known as gap insurance, if you plan on making a small down payment on your car or financing your car over a period of several years. This car insurance coverage type covers the difference between your car’s actual cash value (ACV) and the remaining balance on your auto loan in the event that your vehicle is declared a total loss.

Keep reading to learn more about gap auto insurance such as how you can obtain coverage and how much you can expect to pay for a policy.

On This Page

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  What Is Gap Insurance?

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  How Does Gap Insurance Work?

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  What Does Gap Insurance Cover?

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  How Much Does Gap Insurance Cost?

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  Why Do You Need Gap Insurance Coverage?

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  Is Gap Insurance Worth It?

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  How To Get Gap Insurance

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  FAQs

What Is Gap Insurance?

Gap insurance is a car insurance coverage type that steps in if your vehicle is totaled or stolen and its ACV — which is its value when taking depreciation factors like mileage or wear and tear into account — is less than the amount you still owe your lender.

By paying out the difference between your car’s ACV and your outstanding loan balance, gap car insurance enables you to finish paying off the auto loan for your lost vehicle before taking out a loan for a new car. As a result, it ensures that you won’t have to make payments on two separate auto loans at the same time.

Gap insurance coverage is available through multiple financial institutions including traditional insurance carriers, dealerships and lending institutions such as banks and credit unions. Some lenders and dealers may instead offer to sell you a similar product known as a gap waiver, meaning they will simply write off the difference between your vehicle’s ACV and your auto loan balance if your car is totaled or stolen.

Is Gap Insurance Required?

Gap insurance for cars isn’t required by law in any state but your lender or lessor could require you to buy coverage as a condition of your loan or lease agreement in some states. However, other states like Texas do not allow lenders to require you to purchase gap coverage before approving you for a loan.^[1]

Keep in mind that you may not be able to buy gap insurance unless you already have comprehensive and collision coverage, although your lender or lessor will likely require you to purchase these coverage types anyway if you need to finance or lease your vehicle.^[2]

How Does Gap Insurance Work?

Gap insurance protects you from a major financial loss in case your car depreciates more quickly than you pay off your auto loan. For example, if you purchased a car for $27,000 but it has since dropped to a value of $16,200, then your insurance provider will only pay out $16,200 minus your deductible after your car is totaled in an accident. If you still owe $19,000 to your lender, your gap insurance could bridge the gap by paying out $2,800.

You should note that auto gap insurance from a traditional car insurance company won’t cover your comprehensive or collision insurance deductible.^[3] For example, using the numbers from the example above, your collision insurance payout will only be $15,700 if you have a $500 deductible. While your gap insurance will still pay out $2,800 that you can give to your lender, you will be responsible for paying off the last $500 of your loan out of pocket.

What Does Gap Insurance Cover?

In general, your gap insurance may take effect to help you pay off your car loan if you experience a loss that is covered by your comprehensive or collision insurance. Examples of perils that could total your vehicle and lead to a gap insurance payout include the following:

• Fire
• Hail
• Windstorms
• Flooding
• Earthquakes
• Falling objects
• Theft
• Vandalism
• Civil disturbance
• Collision with an animal or stationary object
• Car accident you are responsible for
• Single car rollover

What Isn’t Covered?

A gap insurance policy won’t cover the costs of purchasing a new vehicle after a total loss like a new car replacement insurance policy would. In addition, you are only eligible for a gap insurance payout if your car is completely lost, meaning this coverage type won’t take effect if your car is damaged but can be fixed for less than it is worth.

Meanwhile, car gap insurance doesn’t provide any sort of liability coverage to help pay for other people’s medical expenses or property repair bills nor will it cover you if you are injured or need to have your property repaired as a result of a car crash.

How Much Does Gap Insurance Cost?

Adding gap insurance to your car insurance policy will typically raise your auto insurance premium by about $20 per year.^[4] However, you could face much higher prices if you decide to buy coverage from a dealer or lender rather than an insurance company.

For example, a gap waiver in California can cost as much as 4% of the total amount you borrow.^[5] So if you take out a $27,000 loan, you could have to make a lump-sum payment of up to $1,080 to secure gap coverage. However, the trade-off for these higher prices is that gap insurance coverage from lenders and dealers may pay your comprehensive or collision deductible.

Why Do You Need Gap Insurance Coverage?

Gap insurance can be beneficial because cars depreciate quickly, which means it is fairly likely that your car will be worth less than the amount you owe your lender at some point. Most vehicles drop in value by over 10% within a month of being purchased and lose about 40% of their original value within five years.^[6]

In particular, gap insurance can keep you from going into substantial debt if your car is totaled or stolen shortly after you buy it, when the discrepancy between the car’s value and your outstanding balance is likely to be the highest.

Without coverage, you risk having to make payments on both the loan for the totaled vehicle and the loan for a new vehicle at the same time.

Is Gap Insurance Worth It?

Gap insurance is recommended for you if your down payment was less than 20% of the value of your car, you financed your car over a period of at least five years, you are leasing your vehicle or your current loan balance includes debt that was rolled over from a previous loan.^[4]

In addition, gap insurance is likely a worthwhile investment if you plan on buying a car that will depreciate faster than the average vehicle.^[4] See the below table for an overview of the 25 vehicles that experience the most depreciation over a five-year period according to a 2023 study.^[7]

Conversely, you likely won’t need to buy gap insurance if you are making a large down payment or financing your vehicle over a short period of time since your car’s ACV is less likely to dip far below your outstanding loan balance. Furthermore, you should drop your gap coverage once your loan balance is close to or less than the current value of your car, which you can check using websites like Kelley Blue Book.

How To Get Gap Insurance

To find the best rate for gap insurance, you should consider comparing car insurance prices from three to five insurance companies. Of course, this could become burdensome if you contact insurers individually to give them information like your car’s make and model, your driving record and details about your loan.

Instead, you should compare quotes quickly and easily using SmartFinancial. Simply answer a few questions about your insurance coverage needs and in no time we’ll connect you with agents who can help you find a policy that fits within your budget. Click here if you’d like to compare auto insurance quotes for free today.