Gap Insurance: Worth The Cost?

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. It is only worth purchasing gap insurance if you owe more on your car loan or lease than your car is worth.

Gap insurance is particularly useful if you have a long-term loan, made a small down payment, or have a car that depreciates in value quickly. It is not required by state law, but it may be required by lenders and lessors.

You can purchase gap insurance from car insurance companies, dealerships, or lenders. It is generally cheaper to buy gap insurance from an insurance company, costing around $20-$40 per year, compared to $400-$700 from a dealership or lender.

When is gap insurance worth it?

Gap insurance is a type of optional coverage that pays the difference between what your vehicle is worth and how much you owe on your car loan or lease if the car is stolen or declared a total loss in an accident. It is worth considering gap insurance if you meet any of the following criteria:

• You made a small down payment (usually defined as less than 20%) when purchasing your car.
• You have a long finance period (longer than two years).
• You are leasing your car.
• You drive more than the average person in your area.
• You have a car that depreciates faster than other cars.
• You rolled over negative equity from an old car loan into your current loan.

Gap insurance is not worth it if any of the following apply to you:

• You made a down payment of at least 20% of the car's value at the time of purchase.
• You expect to pay off your car loan in less than five years.
• You financed or leased a vehicle that holds its value longer than most.
• You could pay for the gap yourself if your car was stolen or totaled.

What does gap insurance cover?

Gap insurance covers the difference between what you owe on a car lease or loan and the amount paid out in a total loss settlement from an auto insurer, minus your deductible. This means that if you owe more on your car than it's worth, gap insurance can help bridge that gap.

For example, if your car is worth $20,000 but you still owe $24,000 on the loan, and it's totaled in an accident or stolen, your normal insurance policy will pay $20,000 (the car's actual cash value) minus your deductible. If you don't have gap insurance, you'll still owe $4,000, and you'll still have to pay off the car even though you can't drive it. But if you do have gap insurance, it will pay the remaining $4,000.

Gap insurance doesn't cover your deductible, and it won't pay out if your car is damaged but not declared a total loss. It also won't cover engine or transmission failure, death, or your insurance deductible.

How does gap insurance work?

Gap insurance, or guaranteed asset protection, is an optional form of coverage that can be added to your car insurance policy. It is intended to cover the difference between the amount you owe on your auto loan and the amount your insurance company pays out if your car is stolen or deemed a total loss.

Here's how gap insurance works:

When to Get Gap Insurance

Gap insurance is typically purchased when there is a significant difference between the value of your car and the amount you owe on it. This could be due to a smaller down payment on a new car, a longer financing term, or a higher depreciation rate. Some lenders and leasing companies may also require you to purchase gap insurance.

How to Get Gap Insurance

You can purchase gap insurance from your auto insurer or through the dealership or lender. However, buying gap insurance through your auto insurer is generally a smarter option, as you may end up paying interest on the coverage if it is bundled with your lease or loan payment.

Cost of Gap Insurance

The cost of gap insurance varies depending on the insurer and your individual circumstances. Auto insurers typically charge a few dollars a month or around $20 a year. Lenders may charge a flat fee of around $500 to $700 for gap insurance, but you will also pay interest on this amount if it is added to your loan.

When to Drop Gap Insurance

You can drop gap insurance when your loan balance is lower than the value of your car. Use resources like the National Automobile Dealers Association (NADA) guide or Kelley Blue Book to determine your car's value and compare it to your loan balance.

What Gap Insurance Covers

Gap insurance covers the difference between the amount you owe on your car loan and the amount paid out by your comprehensive or collision coverage in the event of a total loss or theft. It is important to note that gap insurance does not cover your deductible, engine failure, or other repairs.

How much does gap insurance cost?

The cost of gap insurance varies depending on where you buy it. If you buy gap insurance from a dealership, it can cost hundreds of 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.

According to the Insurance Information Institute, you can add gap insurance to your comprehensive auto insurance policy for as little as $20 a year. However, your cost will vary according to the laws of insurance. Your state, age, driving record, and vehicle type all affect pricing. An insurer typically prices gap insurance at 5% to 6% of the collision and comprehensive premiums on your auto insurance policy. For example, if you pay $1,000 a year combined for collision and comprehensive coverage, gap insurance may add $50 to $60 extra.

Lenders charge a flat fee of around $500 to $700 for gap insurance, according to United Policyholders, a nonprofit consumer group. But if you add the coverage to your loan, you'll also pay interest on it. That means you could pay more than $500 to $700 for three years of gap coverage from a dealer, compared with around $60 from your auto insurer for that same timeframe.

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. If you want to buy a standalone gap insurance policy, you can expect to pay between $200 and $300.

When deciding where to buy gap insurance, it's important to consider the total cost, including any interest charges. Buying gap insurance from a car dealership might seem convenient, but it can often end up costing you more in the long run.

Where can you buy gap insurance?

Gap insurance can be purchased from a few different sources. If you're buying or leasing a new car, you can get gap insurance from the dealer or your auto insurance company. It is usually optional if you're financing a purchase, but it might be mandatory if you're leasing a vehicle.

Buying Gap Insurance from a Dealer

When you buy or lease a 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, which means you'll be paying interest on your gap coverage.

Buying Gap Insurance from an Auto Insurer

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. If you already have car insurance, check with your current insurer to determine the cost of adding gap coverage to your existing policy. Note that you need comprehensive and collision coverage to add gap coverage to a car insurance policy.

Other Sources

You can also buy gap insurance from a company offering stand-alone gap insurance policies or from the bank/financial institution that offered you a loan for purchasing your car.

Frequently asked questions