What is Auto GAP Insurance and Should I Get It?
Gap insurance is a form of optional auto insurance, which helps you pay off your loan when your car has been stolen or totaled and you owe more than it’s worth.
A standard insurance policy only covers the market value of the car at the time of the claim, so gap insurance — an acronym for “guaranteed asset protection” — covers the difference between what you owe on your car loan and the amount the vehicle is actually worth.
Not all drivers will need gap insurance, but this guide can help you determine if it’s right (or necessary) for you.
How does gap insurance work?
When a car is totaled or stolen, standard car insurance pays auto lenders the estimated value of their car. But guaranteed asset protection, or gap insurance, does more. Gap policies cover drivers when they’re underwater or upside down — both terms mean that a driver owes more on their loan than the vehicle is worth — by paying off the remaining balance that’s owed.
If you opted for a long-term loan or made a small down payment, you may likely be upside down on your car loan. That’s because new cars lose value as soon as they’re driven off the lot.
Under these circumstances, your standard comprehensive and collision insurance policies may not cover the total amount you owe on your car loan. In the event of theft or serious damage to your car, gap insurance covers the difference between your loan balance and your car’s depreciation over time. Gap coverage is required for most leases, too.
Example: Gap insurance explained
Here’s an example of how gap insurance works. Let’s say you owe $30,000 on your car loan but your vehicle is only worth $20,000. What happens if the car is totaled?
- Remaining car loan: $30,000
- Actual market value: $20,000
- Insurance deductible: $500
- Gap insurance pay out on the loan: $10,000
With a standard insurance policy, you’d receive the actual market value of the vehicle ($20,000), minus your deductible ($500). That’s a total of $19,500. But you would still owe another $10,000 on the loan. Without a gap policy, you’d have to pay back that remaining $10,000 balance — but with gap coverage, the insurer will pay off some or all of that amount.
What does gap insurance cover?
Gap insurance works with your collision insurance (to cover the vehicle’s cash value in a collision), and comprehensive coverage (to cover the vehicle’s value in other scenarios like severe weather). Here’s what gap insurance covers:
|Gap insurance covers
|Gap insurance does not cover
Drivers who file gap insurance claims should also be aware of other, uncovered costs. Gap insurance doesn’t typically cover increases to the loan balance that are accrued after the insurance claim is filed, such as interest charges and other lender fees.
When you might need gap insurance
Here are some common scenarios where you might need gap insurance:
- It’s required by your lease or loan. Some lenders or dealerships may require gap coverage as part of your contract, and gap insurance is often required for leasing.
- You have a long-term loan or made a low down payment. If you paid less than 20% down, or you have a long auto repayment term, the car will likely lose value faster than you can pay down your loan balance.
- You borrowed more than the value of the car. If you borrow more than 100% of the vehicle’s value, or if you roll over negative equity into your current car, the vehicle is underwater before you even start driving.
- You drive long distances. Excessive mileage or other wear-and-tear can cause a vehicle to lose value faster than the loan can be paid off.
- You drive a luxury vehicle. High-end vehicles tend to lose value quickly. Without adequate coverage for a luxury vehicle, drivers could end up shelling out tens of thousands of dollars to pay off a loan.
When you don’t need gap insurance
Under the right circumstances, gap insurance can be a financial life-saver, but it’s not always necessary. Here are a few common scenarios where you won’t need gap insurance:
- You own your car outright. Gap insurance is only useful for drivers who have outstanding loan debt on their vehicles. If your car is paid off, gap insurance isn’t necessary.
- Your car is worth more than you owe. If you have equity in your vehicle — meaning it’s worth more than you owe on your loan — you don’t need gap coverage. Once your vehicle is no longer underwater, you should cancel your gap coverage and make sure to get a refund for any pre-paid premiums.
How do I get gap insurance?
There are several ways to get gap insurance. Here’s a look at your options:
- Auto insurance companies: You can purchase gap coverage as an add-on to your car insurance policy, often at lower rates than you’d find at a dealership. However, not every insurer offers gap policies, and some only offer them for brand new vehicles or in certain states.
- Auto loan lenders: You can sometimes find gap insurance through credit unions and banks. Although the price is roughly comparable to what insurers offer, lenders often charge a one-time fee (up to $300) to issue the policy.
- Car dealerships: Car dealers may offer gap insurance at the point of sale — however, this is a costly way to buy, since dealerships mark up this add-on by an average of 150% or more. Plus, if it’s bundled into your financing, you could end up paying fees and interest on your gap insurance.
- Gap insurance companies: Some insurance companies offer stand-alone gap insurance that can be purchased independently of other coverage. However, this may not be as affordable as adding it to your current policy.
Depending on your insurer, including gap insurance to comprehensive and collision coverage typically only adds around $5 to $8 per month to your premium.
Frequently asked questions
Is gap insurance required on a car loan?
Not all lenders require borrowers to carry gap insurance, but in certain circumstances, your financing company may require you to add specific coverage to your vehicle’s insurance policy.
Can I get gap insurance after I buy a car?
Yes. Some insurers even offer gap coverage for vehicles that aren’t brand new, as long as they’re younger than a set model year.
Can I get gap insurance through my insurance company?
It depends. Not all auto insurers offer gap coverage — but if yours does, you may be able to add it to your standard auto insurance policy.
How much does gap insurance cover?
Gap insurance can cover some or all of the difference between a vehicle’s market value and the borrower’s loan balance. For example, certain insurers will only pay out up to 25% of the car’s total market value toward the remaining loan balance.
How does gap insurance work after a car is totaled?
First, you’ll need to file a claim with your insurer and wait for them to declare the vehicle a total loss; this could take up to 30 days. If the car is determined to be beyond repair, your comprehensive or collision coverage will pay the market value of your vehicle to the lender — then your gap coverage will take care of part or all of the remaining balance that’s left on your loan or lease.