What Is Gap Insurance For Cars and How Does it Work?

Written by Banks Editorial Team
3 min. read
Written by Banks Editorial Team
3 min. read

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If your car is stolen or totaled in an accident, gap insurance will kick in to pay off the outstanding balance on your loan if you owe more than it’s worth. It can be purchased as an add-on coverage and possibly save you a sizable amount of cash. Read on to learn more about how it works, how to decide if it’s a worthwhile investment, exclusions and where to purchase coverage. You’ll also learn how to save on GAP insurance if you buy it for your ride. 

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What Is Gap Insurance for Cars and How Does It Work?

Guaranteed Asset Protection (GAP) insurance allows drivers to fill the void between their auto loan balance and the cash value of their car if it’s stolen or involved in an accident and categorized as a total loss. 

To illustrate how it works, assume you purchased the car of your dreams for $40,000. A few years into the loan term, it’s stolen while you’re on vacation and the remaining balance on your auto loan is $25,000. The car held its value fairly well and was worth $22,000 at the time of the incident. The lender would receive $22,000 from the auto insurance company through your comprehensive or collision coverage, and gap insurance would cover the remaining $3,000. 

Do You Need Gap Insurance for Your Car? 

 When You Should Get Gap Insurance

  • You put less than 20 percent down payment when you purchased the vehicle, and you’ll need some time before you build up a substantial amount of equity. 
  • Your loan term is greater than 60 months, and you’ll likely be upside down in your auto loan in a few years. 
  • Your vehicle depreciates rapidly, and your car will be worth far less than you paid for it sooner than later. 
  • You’re planning to accumulate a lot of miles on your car, and the cash value will likely drop significantly in a short period. 
  • You currently lease your car, and gap insurance is mandatory. 
  • You traded in another vehicle to purchase your current one and plan to roll the amount owed on the old loan (known as negative equity) into the new loan.

What Doesn’t Gap Insurance Cover?

Before you buy gap insurance, be mindful that it doesn’t cover the following: 

  • Auto insurance deductibles 
  • Car or truck repairs
  • Major mechanical work or failures
  • Past due payments or late fees incurred on your current auto loan or lease 
  • The down payment on a new vehicle

Where To Get Gap Insurance for Your Car

Banks and Credit Unions

You can work directly with the lender if you’re not using dealer financing to buy coverage. 

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Car Dealership or Lenders

If you finance your auto loan in-house at the dealership, you can purchase gap insurance when securing the loan.   

 Auto Insurance Companies

Gap insurance is readily available through auto insurance companies. Compare your options to find the best deal. 

How Much Does Gap Insurance Cost?

It varies by individual, but you’ll likely get a better deal by buying coverage through an auto insurance provider. You’ll pay between $20 and $30 annually in most instances. But if you buy a policy through the dealership, you’ll pay up to $700 for coverage plus interest if you roll the fee into the loan. 

Ultimately, the amount you’ll pay will depend on the make and model of your vehicle, its age and what it’s worth. The insurance provider will also review your driving record to come up with a rate that accounts for the risk you pose (if any). 

How To Save On Gap Insurance

When scoping out your options to purchase gap insurance, you’ll likely find that the cost of coverage differs across the board. So, it’s pertinent that you do your research to get the best rate. 

You can also use Auto Approve to find a good rate on gap insurance if you’re planning to refinance your existing auto loan, motorcycle loan, or buy out your lease. It’s an online platform that partners with a vast network of banks and credit unions to not only get you an exceptional deal on vehicle or motorcycle refinancing. 

Here’s what you should know about gap coverage with Auto Approve: 

  • You’ll be protected from the negative equity in the event of an auto accident or theft. 
  • The coverage works in conjunction with your auto policy’s Comprehensive and Collision coverage to pay the difference between what you currently owe and what the car is worth. 
  • The added protection shouldn’t cost you more than $14 per month. Plus, you’ll get peace of mind knowing you’re covered if the unthinkable happens. 

It’s fast and easy to get a quote, and you won’t have to provide your Social Security number or undergo a hard credit check. Even better, rates start at only 2.25 percent, so it’s worth inquiring with Auto Approve. 

Consider completing a brief questionnaire to discover just how much you could save by refinancing your current loan. If you find a loan that works for you, Auto Approve will coordinate with the lender and handle the paperwork for you.

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