Alyssa Lane
Guaranteed Asset Protection (GAP) insurance is an optional form of auto insurance that covers the difference between the amount owed on a financed car and its actual cash value (ACV) in the event of theft or a total loss. GAP insurance is worth considering if you owe more on your car loan than the car is worth, made a small down payment, have a long finance period, or purchased a vehicle that depreciates quickly. The cost of GAP insurance varies but is generally inexpensive, with auto insurers charging around $20-$40 per year and lenders charging a flat fee of $500-$700 on average. GAP insurance may not be necessary if you made a substantial down payment, expect to pay off your car loan in less than five years, or leased or purchased a vehicle that holds its value.
| Characteristics | Values |
|---|---|
| Type of insurance | Optional auto insurance coverage |
| When to use | When a new vehicle you've financed is totaled or stolen |
| What it covers | The difference between your car's actual cash value and the amount you currently owe on your loan or lease |
| Cost | Fairly inexpensive; $20-$40 per year on average; $200-$300 on average if purchased independently |
| When to buy | When you owe more on your auto loan than your car is worth; when you've made a small down payment; when you have a long finance period; when you've purchased a vehicle that depreciates quickly |
| When not to buy | When you've made a down payment of at least 20% of the car's value; when you expect to pay off your car loan in less than five years; when you've financed or leased a vehicle that holds its value |
What You'll Learn
When is auto gap insurance worth it?
Auto gap insurance is worth it in several scenarios. Firstly, if you owe more on your car loan than the car is worth, gap insurance can help bridge the financial gap. This is especially relevant if you've made a small down payment or have a long finance period, as you may quickly owe more than the car's value.
Secondly, if you've leased your car, gap insurance is often required as a protective measure. Some lease providers include gap insurance in the lease price, while others mandate that you purchase it separately.
Thirdly, if your car depreciates faster than average, gap insurance can be beneficial. Certain vehicles, such as luxury cars or SUVs, tend to lose value at a faster rate. By having gap insurance, you can minimise potential financial losses due to depreciation.
Lastly, if you've rolled over negative equity from an old car loan into a new one, gap insurance can provide valuable protection. This type of insurance ensures that you won't be left with a significant financial burden if your vehicle is declared a total loss.
In summary, auto gap insurance is worth considering if you have a lease or loan, a small down payment, a long finance period, a vehicle that depreciates quickly, or if you've rolled over negative equity from a previous loan. It serves to protect you from financial stress in the event of an accident or theft, ensuring you don't owe more than your car's value.
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How does auto gap insurance work?
Guaranteed Asset Protection (GAP) insurance is an optional form of auto insurance that covers the difference between the amount you owe on your car and its actual cash value (ACV) in the event of a total loss or theft. This type of insurance is particularly useful if you owe more on your car loan than the car is worth, as it can help you avoid being left with a large bill for a car you can no longer drive.
For example, imagine you still owe $10,000 on your car loan, but your car is only worth $8,000. If your car is then written off in an accident, your standard insurance will only pay out $8,000, leaving you with a $2,000 bill. However, if you have GAP insurance, it will cover this $2,000 difference, meaning you won't be out of pocket.
GAP insurance is especially relevant for new cars, as they depreciate in value very quickly. As soon as you drive a new car off the lot, its value starts to depreciate, and it can lose up to 25% of its value in the first year alone. This means that if your new car is written off within the first few years of ownership, you could easily owe more than it's worth.
GAP insurance is also useful if you've made a small down payment on your car, taken out a long-term loan, or your car has high mileage. It's also often required for leased vehicles. However, GAP insurance is not necessary if you've paid for your car in cash or if you've made a large down payment, as you're less likely to owe more than the car is worth.
The cost of GAP insurance varies depending on factors such as the value of your vehicle, your credit score, and where you buy the insurance. Dealerships typically charge more for GAP insurance than insurance companies, so it's worth shopping around. Adding GAP insurance to an existing insurance policy can cost as little as $20 per year, while buying it separately can cost several hundred dollars per year.
It's worth noting that GAP insurance doesn't cover everything. It won't cover your car payments if you lose your job or become disabled, and it won't pay for a rental car while your car is being repaired. It also doesn't cover the cost of repairs if your car is damaged but still drivable.
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What does auto gap insurance cover?
Gap insurance covers the difference between the compensation you receive after a total loss of your vehicle and the amount you still owe on a car loan. This type of insurance is particularly useful if you have financed a new vehicle that is then written off or stolen, and you owe more on the loan than the car's value.
For example, if you owe $25,000 on your loan and your car is only worth $20,000, gap insurance will cover the $5,000 difference, minus your deductible.
Gap insurance is an optional add-on to your auto insurance policy, and it is not required by any insurer or state. However, some lenders and leasing companies may require you to purchase it. It is also known as guaranteed asset protection (GAP) insurance, and it is designed to protect you from financial loss due to depreciation.
Gap insurance does not cover other property or injuries resulting from an accident, nor does it cover engine failure or other repairs. It is also worth noting that gap insurance won't pay out if your car is damaged but not declared a total loss.
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Who offers auto gap insurance?
Several national auto insurers offer gap insurance, including:
- Auto-Owners Insurance
- State Farm (if you are financed directly through their bank)
- Progressive
- Nationwide
You can also get gap insurance from your car dealership or auto lender when you purchase the vehicle. However, you will pay slightly more this way because the cost is added to your auto loan payments with interest.
Bear in mind that insurance companies only sell gap coverage as an add-on to an existing policy. In other words, you can’t have a Progressive policy and get State Farm gap insurance. You need to stick with the same provider you have.
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How much does auto gap insurance cost?
The cost of auto gap insurance varies depending on several factors, including the type of provider, the age and value of the car, and the driver's location and history.
Cost by Provider Type
Gap insurance is available from dealerships, lenders, and insurance companies. Dealerships and lenders typically charge a flat rate of between $500 and $700 for gap insurance, which is usually added to the loan with interest. Insurance companies, on the other hand, charge an average of $20 to $40 per year for gap insurance when bundled with an existing insurance policy.
Cost by Car Age and Value
The cost of gap insurance is also influenced by the age and value of the car. Gap insurance on a used car may be cheaper than on a new car since the cost of the car and its value tend to decline with age and use.
Cost by Location and History
The state in which the driver lives, their previous car insurance claims, and their driving record can also impact the cost of gap insurance.
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Frequently asked questions
Auto gap insurance, or guaranteed asset protection, 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 totaled.
Auto gap insurance protects you from depreciation. Once you buy your car, its value starts to decrease. If you finance or lease a vehicle, this depreciation leaves a gap between what you owe and the car's value. For example, if you owe $25,000 on your loan and your car is only worth $20,000, your gap coverage will cover the $5,000 gap, minus your deductible.
Auto 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. However, if you do have a lease or loan, consider whether you can afford to pay the difference between the amount you still owe and the value of your car in the event of theft or a total loss. If you couldn't make that payment or don't want to deal with that financial stress in an emergency, then you would benefit from having gap coverage.
