What is Gap Insurance on a Car?

Last updated August 3, 2022

What is Gap Insurance on a Car?

If you’ve ever leased a car or taken out an auto loan, you may have been offered gap insurance. But what is gap insurance on a car, and how does it work to protect you financially? Discover everything you need to know about gap auto insurance to help you decide whether or not you need this optional coverage.

What is gap auto insurance, and how does it work?

Gap insurance is designed to cover the difference between the amount you owe on your loan and your vehicle’s actual value in the event it’s totaled or stolen. In other words, it protects you from being “upside-down” on your loan.

While gap insurance is not required by law, it can be a wise investment if you’re financing or leasing a brand-new vehicle. If you’re in an accident shortly after you get your new vehicle, your insurance will typically only pay up to the market value of the vehicle – not the value of your loan. Since the market value of new cars depreciates rapidly, you may owe more on your loan than your car is worth. Gap insurance can help protect you from having to pay out-of-pocket for the remaining balance of your loan in the event of a total loss.

For example, say you bought your car with a loan for $20,000. A few months later, the market value of your car is $17,000. Your car is totaled in an accident, so your insurance provider pays you $17,000 to match the market value of your car. You’re still responsible for paying off your entire loan, so you need to pay your lender $3,000. Gap insurance would help cover this unexpected cost.

Who should get gap insurance?

If you have a loan or lease on your vehicle, gap insurance is something you might want to consider. Gap insurance covers the gap between what you owe on your car and the actual cash value of your vehicle in the event that it’s totaled in an accident.

When deciding if gap insurance is right for you, it’s important to consider the size of your down payment, the length of your loan or lease, and the value of your vehicle.

Gap insurance is typically a good idea when:

You lease or buy a brand-new car
You finance a new car less than three years old
You pay a small down payment (less than 20%)
You have a lengthy loan or lease (60+ months)
Your vehicle has a low resale value

Gap insurance might not be necessary when:

You lease or buy a used car that’s more than three years old
You pay a large down payment (more than 20%)
You have a short loan or lease (less than 60 months)
Your vehicle has a high resale value

Ultimately, whether or not to purchase gap insurance is a personal decision and depends on your situation.

Can you put gap insurance on a used car?

Gap insurance is typically only available for new cars, and you will likely need collision and comprehensive coverage on your insurance policy before you can purchase gap insurance. However, if you lease or have a loan on a used car that’s less than three years old, gap insurance may make sense.

How to get gap insurance on a car?

If obtaining gap insurance coverage is important to you, consider these three steps to purchase gap insurance for your car.

Talk to your insurance agent. While the car dealership might offer to provide you with a gap insurance policy, you may be able to get better rates through your current car insurance provider. Your agent can help you determine if gap insurance is right for you and explain their different coverage options.
Compare rates from different insurers. Once you know what coverage you need, shop around and compare rates from different companies. Be sure to ask about available discounts, such as those for good drivers or bundling your auto and home insurance policies.
Read the fine print. Before you purchase any insurance policy, it’s important to read the fine print to understand exactly what’s covered and what’s not. That way, there won’t be any surprises down the road if you need to file a gap insurance claim.

When to cancel gap insurance

One drawback to gap insurance is there will come a time when you no longer need it. Gap insurance only makes sense when you owe more on your loan or lease than your car’s market value. Once you’ve paid down your loan to a point where it’s equal to or less than your car’s market value, you can cancel your gap insurance policy. At that point, if your car is totaled or stolen, a comprehensive or collision insurance policy can cover any remaining balance on your loan.

Sources

Insurance Information Institute – What is Gap Insurance?

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What is Gap Insurance on a Car?