Gap Insurance: Finance Fee Or Not?

Gap insurance is an optional, additional form of car insurance that covers the difference between the amount owed on a car loan or lease and the car's actual cash value in the event of theft or a total loss. It is designed to protect drivers from being stuck paying for a vehicle they can no longer drive. Gap insurance is not a finance charge, but it can be added to a car loan through a dealer, meaning you pay interest on it.

Gap insurance covers the difference between the value of a car and the amount owed on a loan or lease

Gap insurance is an optional, add-on insurance product that covers the difference between the value of a car and the amount owed on a loan or lease. This type of insurance is intended to cover the difference between the amount owed on an auto loan and the amount the insurance company pays if the car is stolen or totaled.

When you buy or lease a new car, it starts to depreciate in value immediately. Most cars lose 20% of their value within the first year. Standard auto insurance policies cover the depreciated value of a car, meaning they pay the current market value of the vehicle at the time of a claim. However, in the early years of a vehicle's ownership, the amount of the loan may exceed the market value of the vehicle. This is where gap insurance comes in. It covers the difference between what a vehicle is currently worth (which your standard insurance will pay) and the amount you owe on it.

For example, let's say you buy a $50,000 car with a down payment of $10,000. Three years later, the car is worth $20,000, but you still owe $24,000 on the loan. If the car is totaled in an accident or stolen and declared a total loss, your normal insurance policy will pay $20,000, or the car's actual cash value, minus your deductible. Without gap insurance, you would still owe $4,000 and would have to pay off the car even though you can't drive it. But with gap insurance, the remaining $4,000 would be covered.

Gap insurance is typically offered by car dealers, lenders, and leasing companies, as well as insurance companies. It can be purchased independently for an average rate of $200-$300, or it can be added to an existing insurance policy for an average of $20-$40 per year. It is generally a good idea to consider buying gap insurance if you made a small down payment (less than 20%), leased the vehicle, financed for 60 months or longer, or purchased a vehicle that depreciates faster than average.

It is optional but can be required by lenders and lessors

Gap insurance is an optional form of car insurance that covers the difference between the amount owed on a car loan or lease and the car's actual value in the event of theft or a total loss. While it is not required by state law, lenders and lessors may require it. This is especially true for drivers who:

• Made a low down payment (typically less than 20%)
• Have a long-term loan (over 4-5 years)
• Drove a car that depreciates quickly, such as an electric vehicle or sports car
• Rolled over negative equity from a previous car loan

In these cases, gap insurance can protect drivers from having to pay off a loan or lease on a vehicle they can no longer drive. For example, if a driver owes $25,000 on a car but its actual value is only $20,000, gap insurance will cover the $5,000 difference (minus any deductible) in the event of a total loss.

Gap insurance can usually be purchased directly from a dealership, lender, or lessor for a one-time cost of $400 to $700. However, it can also be purchased through an insurance company and added to an existing policy for a much lower cost of around $20 to $40 per year. When deciding whether to purchase gap insurance, drivers should consider their financial situation and the likelihood of facing a significant gap between their car's value and the amount they owe.

It is worth it if you owe more on your car than it is worth

Gap insurance is an optional type of car insurance that covers the difference between the amount owed on a car loan or lease and the car's actual value in the event of theft or a total loss. It is worth considering if you owe more on your car than it is worth.

If your car is stolen or written off, standard insurance will only cover the car's value, leaving you to pay off the remaining loan. Gap insurance covers this difference, ensuring you don't have to make payments on a car you can no longer drive.

For example, imagine you buy a $50,000 car with a $10,000 down payment. Three years later, the car is worth $20,000, but you still owe $24,000 on the loan. If the car is stolen or written off, your insurance will pay $20,000 minus your deductible. Without gap insurance, you will still owe $4,000, which you will have to pay off despite not having a car. Gap insurance covers this $4,000.

Gap insurance is particularly useful if you have a long-term loan (more than four years), made a small down payment (less than 20%), or have a car that depreciates quickly in value. It is also often required by lenders and lessors.

However, gap insurance is likely not worth it if you have already paid off most of the loan, made a substantial down payment, or could afford to pay the difference yourself.

You can purchase gap insurance from car dealerships and lenders, or add it to your existing policy through an insurance company. Dealerships and lenders typically charge a one-time fee of $400 to $700, while insurance companies charge a low monthly rate of around $3.

If you decide to purchase gap insurance, remember to cancel it once you owe less on your car than its value, as it is no longer necessary.

It is not needed if you own your car outright

Gap insurance is an optional, additional coverage that can help certain drivers cover the difference between the financed amount owed on their car and the vehicle's actual cash value in the event of a covered incident where their car is declared a total loss. This type of insurance is not required by state law, but it may be required by lenders and lessors.

If you own your car outright, you do not need gap insurance. Gap insurance is intended for drivers who owe more on their car loan than the car is worth. If you own your car outright, there is no "gap" between the amount owed on the car and its current value. However, you will still need standard car insurance coverage to protect yourself and your car from unexpected events.

Gap insurance is typically purchased by drivers who have financed their vehicle with a loan or are leasing their vehicle. In these cases, the driver may owe more on their loan or lease than the current value of the vehicle. If the car is in an accident or is stolen, standard car insurance will only cover the current value of the car, leaving the driver to pay off the remaining loan or lease balance. Gap insurance covers this difference, protecting drivers from having to pay for a vehicle they can no longer drive.

If you own your car outright, you have no loan or lease balance to worry about, and therefore do not need gap insurance. However, it is important to maintain comprehensive car insurance coverage to protect yourself and your vehicle in the event of an accident, theft, or other unexpected incidents.

It can be purchased from car insurance companies, lenders, or dealerships

Gap insurance can be purchased from car insurance companies, lenders, or dealerships. When buying a new car, the dealer will likely ask if you want to purchase gap insurance when you discuss your financing options. However, buying gap insurance from a dealer can be more expensive if the cost of the coverage is bundled into your loan amount, as you'll end up paying interest on your gap coverage.

Gap insurance is also available from lenders and dealerships at a flat rate, though this will also be more expensive than buying it through an insurance company. It's important to note that gap insurance purchased from a dealer is typically much more expensive than buying it from a car insurance company.

The easiest way to buy gap insurance is through an insurance company. 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. If you already have car insurance, check with your current insurer to see how much it would cost to add gap coverage to your existing policy. Note that you need comprehensive and collision coverage to add gap coverage to a car insurance policy.

Some of the best auto insurance companies for gap insurance include Travelers, The Hartford, and Liberty Mutual.

Frequently asked questions