Gap Insurance: What Banks Offer

Gap insurance is an optional type of car insurance that covers the difference between what a car is worth and what the driver owes on their auto loan or lease if the car is stolen or declared a total loss. This type of insurance is especially useful if you've made a small down payment on your vehicle, have a long-term loan, or have a car that depreciates in value quickly.

Gap insurance is not required by state law, but it may be required by lenders and lessors. You can purchase gap insurance from car insurance companies, banks, and credit unions, or directly from car dealers, lenders, or lessors. However, buying gap insurance from a car dealership might be more expensive in the long run as the cost is added to your principal, which is then used to calculate your interest.

What is gap insurance?

Gap insurance, or guaranteed asset protection, is an optional form of financial protection for drivers. It covers the difference between the current value of a car and the amount still owed on a loan or lease in the event of the car being stolen or written off.

When a car is stolen or written off, standard car insurance policies will only cover the current market value of the vehicle. This can lead to a 'gap' between the amount paid out by insurance and the amount still owed to a lender. Gap insurance covers this difference, so the driver isn't left paying for a vehicle they can no longer drive.

Gap insurance is only relevant when a driver has taken out a loan or lease on their vehicle. If a driver owns their car outright, gap insurance is unnecessary.

Gap insurance is typically offered by car dealerships, lenders, and car insurance companies. It can be purchased as a standalone product or as an add-on to a comprehensive insurance policy. The cost varies depending on the provider, with insurance companies offering the cheapest rates, and dealerships and lenders the most expensive. When purchased from a dealership or lender, the cost of gap insurance is added to the total loan amount, increasing the total interest paid over time.

When do you need gap insurance?

Gap insurance is only necessary if you're leasing a vehicle or purchasing one with a loan. If you're buying a car with cash, you don't need it. However, if you're taking out a car loan, it's worth considering your specific situation. Gap insurance is designed to protect you if your vehicle is financed and you make a total loss claim, either after your vehicle is totaled or stolen.

• You have a longer-term loan: The longer the loan term, the more likely it is that your car's value will drop below what you owe. This is because the principal loan balance is paid off more slowly with longer repayment terms.
• You have a high-interest rate on your loan: Similar to longer-term loans, high-interest rates can also lead to a situation where you owe more on your loan than your car's value.
• You made no down payment or a small down payment: If you didn't make a substantial down payment, the amount you owe in car payments can quickly exceed your car's value.
• You'll put a lot of miles on the car: The more miles you drive, the faster your car depreciates. This can lead to a situation where you owe more than the car's value.
• The car model is likely to depreciate quickly: Some cars, such as sports cars or electric vehicles, depreciate in value faster than others. In this case, gap insurance can be a good idea.
• You have a long-term loan: Longer-term loans increase the likelihood that you'll have negative equity, where you owe more than the car's value.
• You carried over negative equity from a past car loan: If you have negative equity from a previous loan, gap insurance can protect you in case of a total loss.
• You lease the vehicle: Leased vehicles often include gap coverage automatically, but it's a good idea to confirm this with your leasing company.

In summary, gap insurance is worth considering if you fall into any of the above categories. It can provide valuable protection in case your vehicle is totaled or stolen, and you owe more on your loan than the car's value. However, if you're buying a car with cash or if you don't fall into any of the above scenarios, gap insurance may not be necessary.

How much does gap insurance cost?

The cost of gap insurance varies depending on where you buy it. Dealerships and lenders charge a flat rate, typically between $500 and $700, which are the highest rates for this type of policy. Plus, you will pay interest on the sum since it will be rolled into your loan.

Insurance companies, on the other hand, charge an average of $20 to $40 per year for gap insurance when buyers bundle it into an existing insurance policy. This will only increase your comprehensive and collision insurance cost by about 5% to 7% on average. If you want to buy a standalone gap insurance policy, you can expect to pay between $200 and $300.

According to the Insurance Information Institute, auto insurers typically charge a few dollars a month for gap insurance or around $20 a year. Your cost depends on individual factors, like your car’s value.

Lenders charge a flat fee of around $500 to $700 for gap insurance, according to United Policyholders. But if you add the coverage to your loan, you’ll also pay interest on it.

Prices and interest rates will vary, so always check with your dealer and car insurance company to accurately compare costs.

Is gap insurance worth it?

Gap insurance is a type of car insurance that covers the "gap" between what a car is worth and what the driver owes on their auto loan or lease if the car is stolen or declared a total loss. It is an optional coverage that pays the difference between what your vehicle is worth and how much you owe on your car loan at the time it’s stolen or totalled.

Gap insurance is worth it if you lease a vehicle or have a loan. You also don’t need it if your loan is paid down below the value of your car.

If you do have a lease or loan, you may want to think about whether you can afford to pay the difference between the amount you still owe and the value of your car. If you couldn’t make that payment, or don’t want to deal with that financial stress in an emergency, then you’d probably benefit from having gap coverage.

• Cost: Gap insurance is generally inexpensive, but the cost can vary depending on where you purchase it. You can buy it as an add-on to your auto insurance policy or through a dealer, bank, or credit union. Buying it through your auto insurance provider is usually the cheapest option.
• Coverage options: Gap insurance only covers new vehicles that you have financed or leased. It is not necessary if you own your car outright.
• Available providers: Not all insurance companies offer gap insurance, so you may need to switch providers if your current company doesn't offer it.
• Qualifying criteria: To be eligible for gap insurance, you typically need to be the original loan or leaseholder, and your car can't be more than two to three years old.
• Other factors: Consider your financial situation and whether you could afford to pay off your auto loan if your car is stolen or totalled. Also, think about the likelihood of needing gap insurance based on factors such as the length of your loan, the interest rate, the size of your down payment, the expected depreciation of your car, and your driving habits.

In summary, gap insurance is worth considering if you have a lease or loan on a new vehicle and you want protection in case your car is stolen or totalled. However, it may not be necessary if you can afford to pay off your loan without insurance or if you own your car outright. Be sure to shop around and compare costs from different providers to get the best deal.

Where can you buy gap insurance?

Gap insurance is an optional form of car insurance that covers the difference between the amount you owe on your car loan or lease and the car's value if it is stolen or written off. This type of insurance is not required by law but may be required by your lender or lessor.

There are two main ways to buy gap insurance:

• From your auto insurer, as part of your regular insurance policy.
• Through the dealership or lender, rolled into your loan payments.

Buying gap insurance from your auto insurer

You can generally only add gap insurance to your policy if you still owe money on the vehicle or lease. You can typically add gap coverage to an existing car insurance policy or a new policy, as long as your loan or lease hasn't been paid off. Buying gap insurance from an insurance company may be less expensive, and you won't pay interest on your coverage.

Buying gap insurance from a dealership or lender

Gap insurance can be purchased from many car dealers, although these policies are usually quite expensive. Gap coverage may also be available from your lender, and its cost will be included in the total amount you finance with the loan. Similarly, leases commonly include gap coverage or a waiver of "gap liability" by default. If you buy gap insurance from a dealership or lender, the cost is usually added to your principal, which is then used to calculate your interest.

NerdWallet recommends buying gap coverage through your auto insurer rather than from a dealership to avoid paying interest on it. According to CNBC, the cheapest option is usually to get gap insurance directly from your auto insurance provider and skip the gap coverage offered by car dealers.

Frequently asked questions