Gap Insurance: Negotiating With Dealers

When purchasing a new car, the dealer will likely offer you Guaranteed Asset Protection (GAP) insurance, which covers the difference between the amount you owe on your auto loan and the amount the insurance company pays if your car is stolen or totalled. While GAP insurance is optional, it might not be optional if you're leasing a vehicle. Dealership GAP insurance is usually more expensive than GAP coverage from an insurance company, bank, or credit union, as the cost is typically added to your loan balance, which means you pay interest on it. Before agreeing to GAP insurance from a dealer, it's important to compare prices and coverage with other providers, as you may be able to get a better deal.

Gap insurance is optional

If you are financing a purchase, gap insurance is usually optional, but if you are leasing a vehicle, it might not be. Your lender may require some form of gap coverage when you finance your car. However, your lender may include a gap waiver in your loan or lease, which eliminates the need for gap insurance.

You can typically get gap insurance through your auto insurer or car dealership. Although dealership gap insurance is usually included when purchasing a vehicle, you can decline it. Some insurers might sell gap insurance as a standalone insurance policy, but it's more commonly added to your existing auto insurance policy.

If you choose to finance a gap policy into your loan, it will add to your total loan amount, which ultimately increases what you'll pay in total interest over time. Gap insurance from a car dealership typically costs much more than gap coverage from an insurance company, bank, or credit union, and the cost is usually added to your loan balance, meaning that you have to pay interest on it. The cost of gap insurance from a dealership can range from $400 to $700, plus interest. On the other hand, gap insurance from your car insurance company will likely cost $20-$40 per year, or about 6% of your collision and comprehensive premium.

If you are told you must purchase gap insurance to qualify for financing, ask where this is stated in the sales contract, or contact the lender yourself to find out if that is true. If it is true, the cost of the gap insurance must be included in the finance charge and reflected in the disclosed annual percentage rate (APR). If it's optional, you can decline it.

Compare prices and coverage

When comparing prices and coverage for GAP insurance, it's important to consider the different types of policies available and choose the one that best suits your needs. Here's a detailed overview:

Return-to-Invoice GAP Insurance

Return-to-invoice GAP insurance covers the difference between your car insurance payout and the exact price you paid for the car. This type of policy can be useful for both new and used cars, especially if the value of your car fluctuates. It offers peace of mind, knowing that you'll be covered for the full amount you paid.

Return-to-Value GAP Insurance

Return-to-value GAP insurance is similar to return-to-invoice insurance, but instead of covering the full price you paid, it tops up the difference between the write-off settlement from your insurer and the value of the car when you bought it. This type of policy is more suitable for used cars, as it accounts for the depreciation in value since the original purchase.

Vehicle Replacement GAP Insurance

Vehicle replacement GAP insurance covers the cost of replacing your car with a brand-new model of the same make, model, and specifications. This type of policy is ideal if you want to ensure you can get a new car, even if the price of the same model has increased since your original purchase. However, it may not be the most cost-effective option, as it covers the price of a brand-new vehicle.

Finance GAP Insurance

Finance GAP insurance is designed for those who have taken out a car finance loan or lease. It covers the amount you still owe to the finance company if your car is written off, so you won't be left making monthly payments for a car you no longer own. This type of policy is standard and common, especially for those with finance agreements.

Negative Equity GAP Insurance

Negative equity GAP insurance offers protection if the value of your car decreases, leaving it worth less than the loan amount you've taken out. This type of policy is useful if you're part-exchanging your car for a more expensive model, as it covers any potential loss due to negative equity.

Lease GAP Insurance

Lease GAP insurance is specifically designed for leased vehicles or those bought on a contract hire purchase. It covers any remaining repayments on your lease agreement, as well as any additional costs that were part of your contract, such as early repayment charges. This type of policy ensures you won't be left paying for a car you no longer have, and it covers any extra costs associated with the lease agreement.

When comparing prices, it's important to consider the excess amount, as a higher excess can lead to a cheaper premium. Additionally, it's worth noting that GAP insurance is often more expensive when purchased directly from a car dealer, so consider buying from an online provider or adding it to your existing auto insurance policy. Remember to read the policy terms and conditions carefully and be aware of any exclusions or limitations on the maximum level of cover.

Gap insurance is more expensive from a dealer

Gap insurance is an optional, supplemental auto policy that covers the difference between the insured current value of a vehicle and the balance of a loan or lease. It is intended to cover the difference between the amount you owe on your auto loan and the amount the insurance company pays if your car is stolen or totalled.

While you can get gap insurance from a car dealership, it is typically much more expensive than buying gap coverage from a car insurance company. Buying gap insurance from a car dealership might seem convenient, but it can often end up costing you more in the long run. Car dealerships typically charge up to $600 for gap insurance that can be added to your loan, according to Trusted Choice, a group of independent insurance agents.

The cost of gap insurance could be rolled into your car loan, but that means you’ll also be paying interest on it. You’ll also lose the flexibility to cancel the gap insurance since it’s tied to your loan, so you might end up paying for something that’s no longer useful.

Gap insurance is much cheaper through a car insurance company. When purchased through your insurer, your premium will increase (usually a minimal amount) when you add the coverage, and you can choose to remove it when it no longer makes sense, potentially leading to a cheaper cost than if you purchased it from the dealer.

If you buy gap insurance from a dealership, it can cost several hundred dollars a year. If you add gap coverage to a car insurance policy that already includes collision and comprehensive insurance, it typically increases your premium by around $40 to $60 per year.

You can decline gap insurance

Gap insurance is optional. You can decline it. If you are told that you must purchase gap insurance to qualify for financing, ask where this is stated in the sales contract or contact the lender to find out if this is true. If it is a requirement, the cost of the gap insurance must be included in the finance charge and reflected in the disclosed annual percentage rate (APR). If it is not a requirement, you can decline it.

Gap insurance covers the difference between what you owe on your car and what it is worth. You might need it if your car is worth less than what you owe on your car loan. New cars lose value fast. As soon as you drive a new car off the lot, it is second-hand and has already lost value. If your car is stolen or written off, your auto insurance will pay you what the car is currently worth – not what you originally paid or how much you still owe.

Your car dealer or bank might offer you gap coverage when you buy your car. But check with your insurance agent to see if your company has a better deal. Gap products you get from a car dealer or bank might not be insurance. Check the information that comes with a bank or dealer gap product to know how to get help if you need it.

You don't have to buy gap insurance from a dealer. You typically have time to add gap coverage to the new vehicle immediately following the purchase. Be sure to check with your agent so that you’re aware of time limitations and requirements.

If you have already bought gap insurance from your dealer, you can request a gap insurance refund from that dealership. But be sure you have an active policy in place before you cancel your dealer’s policy.

Gap insurance covers the difference

If your car is stolen or written off, your auto insurance will pay you what the car is currently worth, not what you originally paid or how much you still owe. Gap insurance covers the difference between what you receive from the reimbursement and the amount you still owe on the car. For example, if you owe $20,000 on your financing agreement, but due to depreciation, your car's actual cash value is $15,000, your car insurance policy will pay out $15,000. If you have gap insurance, it would cover the $5,000 "gap".

Gap insurance is optional and can be purchased from a car insurance company or a dealer. It is important to compare prices and coverage before you buy. Buying gap insurance from a car dealership might seem convenient, but it can often end up costing you more in the long run. Car dealerships typically charge up to $600 for gap insurance that can be added to your loan, whereas gap insurance costs an average of $61 a year when purchased through a car insurance company.

If you choose to finance a gap policy into your loan, it will add to your total loan amount, which ultimately increases what you'll pay in total interest over time. When purchased at the dealer, gap insurance can cost several hundred dollars or more, spread equally throughout your loan payments and therefore subject to interest. When purchased through your insurer, your premium will increase (usually a minimal amount) when you add the coverage, and you can choose to remove it when it no longer makes sense, potentially leading to a cheaper cost than if you purchased it from the dealer.

Frequently asked questions