Jane Dotson
GAP insurance, also known as Guaranteed Asset Protection, is an optional insurance coverage that covers the difference between the cash value of your vehicle and the amount you still owe on it in the event of a total loss. This type of insurance is particularly relevant if you have a low down payment, a long-term loan, or a vehicle that depreciates quickly. GAP insurance can provide financial protection and peace of mind, but it is not always necessary. Several factors determine whether GAP insurance is worth it, including the cost, coverage options, and providers. It is typically priced at 5% to 6% of collision and comprehensive premiums, and it can be purchased through an insurance company or a dealer.
| Characteristics | Values |
|---|---|
| Cost | Relatively low-cost coverage |
| Coverage options | Supplemental auto coverage, in addition to comprehensive and collision insurance |
| Providers | Available from insurance companies, dealers, or lenders |
| Qualification | Qualification depends on factors such as the loan amount, down payment, and vehicle value |
| Other factors | Peace of mind, financial protection, and preventing payments for undrivable cars |
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What You'll Learn
When is GAP insurance worth it?
GAP insurance is worth it when you need financial protection and peace of mind for your car purchases and leases. It is particularly useful if you have a low down payment (less than 20%) and a long-term loan (60 months or more). In such cases, your car ownership will likely be "upside down", meaning the amount you owe is greater than the value of your car. GAP insurance covers the difference between the value of your car if it is totalled or stolen and the amount you still owe on the car if it is financed or leased.
GAP insurance is also worth considering if you have no down payment, include taxes and fees in your loan, or have negative equity on your trade-in. It can be purchased through your insurance provider as an add-on coverage or from an insurance company that provides GAP insurance.
GAP insurance is typically priced at 5% to 6% of collision and comprehensive premiums, and it is usually cheaper through an insurance company than a dealer or lender. If you purchase coverage from a private lender or a dealership, you will likely pay a flat fee between $500 and $700.
GAP insurance may not be necessary if you made a down payment of at least 20% of the car's value, expect to pay off your car loan in less than five years, or leased a vehicle that holds its value. It is also important to note that GAP insurance does not cover bodily injury or property damage.
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When is GAP insurance not worth it?
GAP insurance is generally not worth it if you have enough cash to cover the difference between your loan balance and your ACV payout. If you have enough savings to cover the cost of a total loss, then GAP insurance is unnecessary.
GAP insurance may also not be worth it if you made a substantial down payment on your vehicle, such as 20% or 25% of the car's value. In this case, you may not need GAP insurance since the market value of your car is likely to stay close to or exceed your loan balance.
Additionally, if you expect to pay off your car loan in a short period, such as less than five years, GAP insurance may not be necessary. This is because you are less likely to owe more on your loan than the car is worth.
GAP insurance is also not worth it if you are leasing or financing a used car, as GAP insurance typically only covers new vehicles. In this case, you may consider alternative insurance options, such as loan or lease payoff coverage, which is available for used cars.
Lastly, GAP insurance may not be worth it if you have alternative coverage options. Some auto insurance companies offer similar coverage to GAP insurance, such as new car replacement coverage or better car replacement coverage. These options may provide sufficient financial protection without the need for GAP insurance.
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How much does GAP insurance cost?
The cost of GAP insurance depends on the underwriter. Dealerships and lenders charge higher prices for GAP insurance than car insurance companies. Lenders and dealerships sell GAP insurance for 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. Doing so only increases your comprehensive and collision insurance cost by about five to six per cent on average, which makes it a lot more affordable. If you want to buy a standalone GAP insurance policy, you can expect to pay between $200 and $300.
GAP insurance is typically priced at 5% to 6% of collision and comprehensive premiums. It is usually cheaper through an insurance company than a dealer or lender. If you purchase coverage through a private lender or a dealership, you will likely pay a flat fee between $500 and $700. If you add the cost of GAP coverage to your car loan, you will likely pay interest on it.
GAP insurance is an affordable way to protect yourself from paying out of pocket if your car is totalled and you owe more on your loan than the car's worth. GAP insurance can be added to many standard auto insurance policies for about $90 a month. It is a good idea for as long as you're still paying off a loan or lease, helping cover the difference between what you owe and your car's depreciated value—until you owe less than the car is worth.
GAP insurance may be the right decision if one or more of the following common situations apply:
- You owe more on your auto loan than your car is worth.
- You made a small down payment or put nothing down for your new car.
- You took out a loan with a term longer than two years.
- You drive more than the average person in your area.
GAP insurance may not be necessary if any of the following apply:
- 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.
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Where can I buy GAP insurance?
If you're buying or leasing a new car, you can get gap insurance from the dealer or your auto insurance company. Usually, gap insurance is optional if you're financing a purchase, but it might be mandatory if you're leasing a vehicle. 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.
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'd be paying interest on your gap coverage. 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, you can check with your current insurer to determine 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 people recommend getting gap insurance from an insurance company rather than a dealer, as it is often much cheaper. Progressive, Allstate, and Nationwide are some of the insurance companies that offer gap insurance. You can also try local credit unions, which may offer competitive rates.
In summary, you can buy gap insurance from a dealer or an insurance company, but it is generally recommended to shop around for the best rates and to consider adding it to an existing insurance policy if possible, to avoid paying interest on the coverage.
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What does GAP insurance cover?
GAP insurance, also called Guaranteed Asset Protection, is supplemental auto coverage that pays off your loan balance in the event your vehicle is financed or leased, and it gets totaled or stolen. It covers the difference between the value of your car and the amount you still owe on the loan or lease. This difference, or "gap", is between what your insurance will pay and the current cash value of your vehicle.
For example, if you financed a new car and it gets totaled in an accident, standard auto insurance policies will only cover the current market value of the vehicle. So, if your car is valued at $27,000 but your loan payoff is $25,500, you will still owe $5,000 after paying your $500 deductible. In this case, GAP insurance will pay that $5,000 difference so you don't have to.
GAP insurance is worth considering if you owe more on your auto loan than your car is worth, if you made a small down payment or put nothing down for your new car, if you took out a loan with a term longer than two years, or if you drive more than the average person in your area. It is also a good option if you cannot afford the out-of-pocket expenses that may arise from an accident. GAP insurance is usually cheaper when purchased through an insurance company rather than a dealer or lender.
However, GAP insurance is not necessary if you made a substantial down payment on your car, if you expect to pay off your car loan in less than five years, or if you financed or leased a vehicle that holds its value.
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Frequently asked questions
Guaranteed Asset Protection (GAP) insurance covers the difference between the value of your car if it’s totalled or stolen and the amount that you still owe on the car if it’s financed or leased.
GAP insurance is worth it if you owe more on your auto loan than your car is worth, if you made a small down payment or put nothing down for your new car, if you took out a loan with a term longer than two years, or if you drive more than the average person in your area.
You can purchase GAP insurance through your insurance provider as an add-on coverage, or through an insurance company that provides GAP insurance. GAP insurance is usually cheaper through an insurance company versus a dealer or lender.
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