In a NutshellGap, or guaranteed asset protection, can help you cover the difference between what your insurance covers and the amount you owe on your auto loan in the event that your car is damaged, stolen or declared a total loss and you owe more than the car is worth. While gap insurance isn’t typically required, a policy can be a lifesaver in certain situations.
Getting in a car accident or having your car stolen are always stressful events. But they can be even more overwhelming when you owe more on your car than what your insurance will pay.
Standard auto insurance covers the current depreciated value of your car at the time of your claim. If you’re upside down on your car loan — meaning you owe more than your car is worth — you could be faced with shelling out thousands of dollars to pay off a car that’s unusable.
That’s where gap insurance comes in: It was created (and named) to bridge that gap between what your insurance provider will cover and your auto loan balance. Let’s take a closer look at how gap insurance works and when you might find it particularly helpful.
How does gap insurance work?
Your auto loan lender may require that you have collision or comprehensive car insurance until you pay off your loan. But these policies usually cover only the actual cash value of your vehicle — your car’s market value at the time of the incident.
Gap insurance is optional coverage that helps cover any difference between what your insurance will pay — likely your car’s cash value — and what you owe on your car loan. If you’re upside down on your car loan, it could be a good idea to buy gap insurance coverage.
Let’s say you owe $9,000 on your car but its market value is only $5,000. If you were to get in an accident and total your car, your insurance company might cover that $5,000, minus your deductible. But you’d still owe another $4,000 to your lender. A gap insurance policy could help cover that $4,000 shortage.
While comprehensive and collision coverage may be required by lenders, gap coverage isn’t usually required. If your lender says you must buy gap insurance, the Consumer Financial Protection Bureau suggests that you ask to see where that requirement is noted in your sales contract. If it’s not there, your lender can’t require you to purchase the coverage, according to the CFPB.
Do I need gap insurance?
If you’re in one of the following situations, you might want to consider gap insurance:
- You made a small down payment — or no down payment at all: If you didn’t make a substantial down payment, there’s a chance you were upside down soon after you left the car lot. New cars depreciate quickly — they can lose 25% or more of their value in the first year alone.
- You chose a long loan term: When you spread your car loan payments over a long period of time, it also takes longer to build up equity. If you financed your car for 60 months or longer, you may want to consider gap insurance.
- Your car make and model depreciates quickly: Some cars depreciate more quickly than others. If you’re buying one of those vehicles, buying a gap insurance policy could be a smart move.
- You plan to put a lot of miles on your car: The faster you put miles on your car, the faster it will depreciate. The average American motorist drives 13,476 miles per year, according to March 2018 data from the U.S. Department of Transportation’s Federal Highway Administration. If you think you’ll put a lot of miles on your car each year, the resulting increase in annual depreciation may make gap insurance a good decision.
- You’re leasing the car: gap insurance may be required if you’re leasing. It’s often included in your lease agreement — in some cases, it’s included for free and in others, it’s an optional feature you can buy for an added charge.
Keep in mind that if you buy a gap insurance policy, you don’t need to keep it forever. If it’s optional, you should be able to cancel your gap insurance policy.
How do I get gap insurance?
Gap insurance is typically purchased at the time you buy comprehensive and collision coverage, though you might be able to get coverage after you buy a vehicle. But some insurers have requirements to purchase gap insurance, like the car needing to be no more than two or three model years old.
Most auto insurance companies sell gap insurance, and there’s a good chance that your car dealership does, too. But gap insurance through a dealer is typically more expensive.
Gap insurance added to collision and comprehensive coverage can add about $20 per year to your insurance premium, according to the Insurance Information Institute.
To make sure you’re getting the best coverage for your needs, compare quotes from several car insurance companies.
Gap insurance isn’t a necessity for every car owner. If you paid for your car with cash, it’s probably not worthwhile to get gap insurance. And if you made a significant down payment on your car loan, standard car insurance coverage may be enough to pay off the remaining balance on your car if it’s stolen or totaled.
But if you’re at risk of becoming upside down on your car loan, gap insurance can be a worthwhile investment that protects your wallet. Just remember to shop around and get quotes from multiple insurance companies.