Gap Insurance: What's The Deal?

Gap insurance is an optional auto insurance coverage that applies if your car is stolen or deemed a total loss. When your loan amount is more than your vehicle is worth, gap insurance coverage pays the difference. For example, if you owe $25,000 on your loan and your car is only worth $20,000, your gap coverage covers the $5,000 gap, minus your deductible. You can get gap insurance from your car insurance company, loan provider, or dealership.

Car dealers

When buying or leasing a new car, you can get gap insurance from a car dealership. Dealerships usually offer gap insurance when you purchase or lease a vehicle. However, it is often more expensive than buying it from an insurer, as the cost is bundled into your loan amount, meaning you pay interest on your gap coverage. Dealerships typically charge a flat rate of $500 to $700 for a gap policy, which can be added to your loan payments and is therefore subject to interest. Some dealers include a 30-day cancellation period, during which you can cancel your gap insurance and receive a full refund.

Gap insurance is optional if you're financing a purchase, but it might be required if you're leasing a vehicle. It is designed to cover the "gap" between what a car is worth and what the driver owes on their auto loan or lease if the car is totalled or stolen. Without gap insurance, drivers can be stuck paying the remaining loan or lease balance on a vehicle that they can no longer drive.

Some lenders or leasing companies require gap insurance to protect them from car owners who walk away from a loan or lease if the car is totalled or stolen. It is also required if you have a large car loan or you bought a vehicle that quickly depreciates in value.

Auto insurance companies

Gap insurance 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 is stolen or totaled. It is intended for those who lease a vehicle or have a loan.

Gap insurance is generally available through your auto insurer, and it is recommended that you purchase it through them as it is cheaper than buying it from a dealership or bank. However, not all auto insurance companies offer gap insurance. Some of the major auto insurance companies that do offer gap insurance include:

• Allstate
• Progressive
• Amica
• Nationwide
• Liberty Mutual
• The Hartford
• Travelers
• The Hartford
• Kemper
• Esurance
• State Farm
• Geico
• USAA

If your auto insurance company does not offer gap insurance, you can also buy it through your car dealership or lender, though this will be more expensive.

When leasing a car

Leasing a car is similar to renting one. It usually involves making an upfront payment, followed by monthly payments to use the car for several years. At the end of the lease, the vehicle is returned to the company. Leasing typically requires smaller monthly payments than buying a car, and leased vehicles are usually new or nearly new, so they are covered by warranties that can make maintenance more affordable.

Even if GAP insurance is not required by your lease agreement, it may still be beneficial to purchase it separately. This is especially true if you made a low down payment, have a long lease term, or are leasing a luxury car, as these factors can increase the potential gap between the car's value and your lease payments.

When deciding whether to purchase GAP insurance, consider the terms of your lease and the potential financial risks. GAP insurance can provide peace of mind and protect you from unexpected costs in the event of an accident or theft.

It's worth noting that GAP insurance only activates if the car is deemed a total loss and is not applicable for minor repairs. Additionally, it requires comprehensive and collision coverage to be in place before it can take effect. Be sure to review your lease agreement carefully and consult with your insurance provider to determine if GAP insurance is right for you.

When financing a car purchase

Gap insurance, or Guaranteed Auto Protection, is an optional form of coverage that protects you financially when you owe more on your car than its current market value. In the event of an accident or theft, standard car insurance will only cover the depreciated value of the vehicle, leaving a "gap" between what your insurance pays and what you still owe. Gap insurance covers this difference, ensuring you don't have to pay out of pocket for a car you no longer have.

When You May Need Gap Insurance

• When financing a car purchase, especially with a small down payment: If you finance a car with a small down payment or no down payment at all, you may owe more than the car's value from the moment you drive it off the lot. Gap insurance can protect you during this period.
• When leasing a vehicle: Leasing companies often require gap insurance as it covers the difference between the depreciated value and the amount owed on the lease.
• When purchasing a vehicle that depreciates faster than average: Some cars, such as luxury sedans or SUVs, may lose value at a faster rate. In this case, gap insurance can be beneficial to ensure you're not left with a large bill if the car is totalled or stolen.
• When financing for 60 months or longer: With a longer financing period, it takes longer for your loan amount and the car's value to balance out. Gap insurance can provide peace of mind during this extended period.

Where to Buy Gap Insurance

You can purchase gap insurance from car insurance companies, banks, credit unions, or directly from car dealerships. It is often offered during the final stages of the car-buying process. While dealerships offer convenience, insurance companies and credit unions typically charge less for the same coverage.

Cost of Gap Insurance

The cost of gap insurance varies depending on the provider and your specific circumstances. On average, it costs around $20-$60 per year when added to your car insurance policy. Dealerships may charge a flat rate of $400 to $700, and this cost can be rolled into your car loan, although you'll end up paying interest on it.

When to Drop Gap Insurance

Once your loan balance is equal to or lower than your vehicle's value, you can consider dropping gap insurance as the "gap" no longer exists. 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.

When your car is worth less than the loan amount

If your car is worth less than the loan amount, you may need gap insurance. Gap insurance covers the difference between what you owe on your car and what it's worth. This is especially important if you have a large auto loan, a low down payment, or a car that depreciates quickly.

Gap insurance is typically needed when you have negative equity or are upside down on your loan. This means that the amount you owe on your car loan is greater than the current value of your car. This can happen if you have a small down payment, a long loan term, or a car that depreciates quickly.

When you submit a total loss claim, your insurer will pay a maximum of the actual cash value (ACV) of your vehicle. If the amount you still owe in car payments exceeds your car's ACV, gap insurance can help you pay off the loan. Remember, the loan doesn't go away just because your car is totaled.

You can buy gap insurance from a car dealership, lender, or auto insurance company. However, it's typically cheaper to add coverage to an existing policy with an auto insurance company. The cost of gap insurance varies but is usually inexpensive, with an average of $61 per year when purchased from an insurance company. If you buy gap insurance from a dealership, it can cost hundreds of dollars per year.

It's important to note that gap insurance is not required by state law, and you don't need it if your loan is paid down below the value of your car. Additionally, if you didn't finance or lease your car, there is no need for gap insurance.

Frequently asked questions