Purchasing an automobile is a sizeable investment, and for most, that means financing or leasing. What if your vehicle is stolen or totaled, though, and you still owe on it? That is where gap insurance comes in. It bridges the gap between the amount your vehicle is worth and what you still owe on your loan. In this article, we’ll summarize all you need to know about gap insurance, why you need it, and if you should add it to your policy.
What Is Gap Insurance?
Gap insurance, or Guaranteed Asset Protection, is an optional coverage that assists in paying off your car loan if your car is stolen or totaled and the insurance payment isn’t sufficient to pay off the outstanding loan balance.
How Does Gap Insurance Function?
Once you purchase a car, it depreciates the moment you drive it away from the dealer’s lot.
If your vehicle is stolen or totaled in a collision, your insurance provider will pay you the actual cash value (ACV) of the vehicle, which might be lower than the amount you still owe on your loan.
Gap insurance pays the “gap” between the ACV payment and the amount you still owe on your loan.
For instance:
You purchase a vehicle for $30,000 with a loan.
Within a year, the value of the vehicle has decreased to $24,000 through depreciation.
You owe $27,000 on the vehicle when your car is wrecked.
Your insurer pays $24,000 in the vehicle’s ACV.
Gap insurance fills the difference of $3,000 so that you do not have to make a personal contribution.
Why You Might Need Gap Insurance
Not everybody requires gap insurance, but it is useful in a number of circumstances:
- You Leased Your Vehicle with a Small Down Payment
If you put down less than 20% on the car loan, you will probably owe more on the vehicle than it’s worth for some time. Gap insurance protects you when an accident happens near the beginning of your loan. - You Have an Extended Loan (60+ Months)
Loans with longer terms of repayment (5-7 years) create slower equity accumulation, so you may be paying more than the car is worth for a long time. - You Leased Your Vehicle
The majority of lease contracts mandate gap insurance because leased vehicles tend to have minimal or no equity. When the car is wrecked, the lease company still demands full payment. - Your Car Depreciates Quickly
Some cars lose value faster than others. If you have a vehicle with high depreciation (such as luxury or electric vehicles), you could find yourself owing more than its market value earlier than you think. - You Rolled Over Negative Equity from a Previous Loan
If you financed a car and rolled an old loan balance into a new one, chances are you began with a greater loan balance than the worth of the car. Gap insurance will avoid monetary loss in such instances.
How Much Does Gap Insurance Cost?
The price of gap insurance differs depending on where you buy it. These are the usual cost options:
Through Your Auto Insurance Provider:
Cost: $20 – $60 per year
Added as an add-on to your full coverage policy
Through the Dealership or Lender:
Cost: $400 – $800 (one-time payment)
Typically financed as part of your loan, adding interest charges
Through a Third-Party Provider:
Cost: Varies depending on provider and terms of coverage
Buying gap insurance from your auto insurer is typically the best value.
Where Can You Purchase Gap Insurance?
Gap insurance can be bought from several sources, including:
Your Auto Insurance Company – The most affordable and easiest option if your company provides it.
Car Dealerships or Lenders – Usually pricier and added into your loan.
Third-Party Providers – Separate policies that can have varying coverage features.
When Should You Cancel Gap Insurance?
You don’t have to take gap insurance for the life of your loan. You can cancel it when:
Your Car’s Value is Greater Than or Equal to Your Loan Balance – At this point, typical auto coverage protects your financial responsibility.
You Paid Off Your Loan – If you do not have a loan anymore, you no longer require gap coverage.
You Sell or Trade in the Car – If you’re disposing of the vehicle, gap insurance is no longer required.
To cancel, call your insurance company and ask to have the policy updated. You may get a refund of unused coverage from some insurers.
Pros and Cons of Gap Insurance
Pros:
Safeguards you against having to pay thousands of dollars if your vehicle is wrecked.
Gives you peace of mind, particularly if you’re the new owner of a car.
Inexpensive if you buy it through your insurer.
Necessary for leased cars, so it’s an essential protection.
Cons:
Not required if you owe less than the car.
More expensive if bought from a dealership.
Only pays for the loan amount, not additional costs such as deductibles or buying a new car.
Is Gap Insurance Worth It?
Whether gap insurance is worth it will depend on your personal finances. You may find that you need it if:
You made a down payment of less than 20% on your car loan.
You bought a car and financed it for 60+ months.
You own a vehicle with a high depreciation rate.
You leased your vehicle (most lease agreements make it mandatory).
But if you paid a significant down payment, paid most of the loan, or have an older vehicle, chances are you don’t need gap insurance.
How to Make a Gap Insurance Claim
If your vehicle is stolen or totaled, follow these steps to claim your gap insurance:
File a Claim with Your Auto Insurance Company – Report the theft or accident and submit required documents.
Get an ACV Settlement – Your insurance company will calculate the actual cash value of your vehicle.
Get a Payoff Amount from Your Lender – Contact your lender for the outstanding loan amount.
Make a Gap Insurance Claim – Submit the settlement amount and loan balance to your gap insurance company.
Get Coverage for the Gap – The gap insurance pays the difference to avoid out-of-pocket costs.
Conclusion
Gap insurance is a savior for motorists who take a loan bigger than their vehicle’s value. Although it isn’t for every motorist, it’s worth considering if you have a minimum down payment, extended loan term, lease agreement, or one that depreciates rapidly. The most economical way to save money on gap insurance is to purchase it through your car insurer instead of the dealership. Take a close look at your budget before buying and determine whether or not this insurance is right for you.
FAQs
- Is gap insurance compulsory?
No, though it might be necessary for leased cars. Otherwise, it’s voluntary coverage against financial loss. - Does gap insurance cover repairs?
No, gap insurance will only pay the difference between your vehicle’s value and your outstanding loan balance if your car is stolen or totaled. - Do I already have gap insurance?
Look at your insurance policy, loan papers, or call your lender to find out if gap insurance was added to your financing. - Can I purchase gap insurance after I’ve bought my car?
Yes, you can have it paid through your insurance carrier, but providers do have a time restriction (e.g., within 12 months of original purchase). - Is gap insurance portable if I am acquiring a new car?
No, gap insurance covers only the car named on the policy. You would need to purchase a new policy on another car.