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

Written by Marc Guberti

Marc Guberti is a Certified Personal Finance Counselor who has been a finance freelance writer
for five years. He has covered personal finance, investing, banking, credit cards, business
financing, and other topics.
Marc’s work has appeared in US News & World Report, USA Today, Investor Place, and other
publications. He graduated from Fordham University with a finance degree and resides in
Scarsdale, New York.
When he’s not writing, Marc enjoys spending time with the family and watching movies with
them (mostly from the 1930s and 40s). Marc is an avid runner who aims to run over 100
marathons in his lifetime.

Updated January 1, 2024​

5 min. read​

It’s common for car loan balances to exceed the car’s value. This isn’t a big deal in a perfect world, but your car can get stolen or totaled. What happens then?

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 lot 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. The policy kicks in if your vehicle is 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. Gap insurance would cover the remaining $3,000.

Do You Need Gap Insurance for Your Car?

Some companies will require you to pay for gap insurance if the gap becomes sizable. This insurance policy may also come up if you apply for a refinance. Most of the time, gap insurance is optional, unlike other car insurance policies. However, it can be a good idea for some car owners to get this policy.

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. A low down payment can make you upside down on your loan by a high margin. Gap insurance can help you sleep better at night.
  • Your loan term is greater than 60 months, and you’ll likely be upside down in your auto loan in a few years. Your car’s value will depreciate quicker than the loan balance.
  • Your vehicle depreciates rapidly, and your car will be worth far less than you paid for it sooner than later. New cars fall into this trend more often than used cars. The latter has already lost considerable value over the years.
  • 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.
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What Doesn’t Gap Insurance Cover?

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

You will need additional car insurance policies to get more coverage. Gap insurance can be a useful asset, but it’s not an umbrella that protects you from everything.

Where To Get Gap Insurance for Your Car

Car owners can get their insurance policies from several providers. Here is a list of resources you can consider.

Banks and Credit Unions

You can work directly with the lender if you’re not using dealer financing to buy coverage. Banks and credit unions usually have higher credit score minimums and more competitive interest rates. It can also take a while to hear back from them.

Car Dealership or Lenders

If you finance your auto loan in-house at the dealership, you can purchase gap insurance when securing the loan. You might get a faster response from car dealerships and lenders. They offer competitive rates on car loans, but those rates vary considerably.

Auto Insurance Companies

Gap insurance is readily available through auto insurance companies. Compare your options to find the best deal. You might find an auto insurance company that can cover all of your policies. However, you will need comprehensive insurance and automobile liability insurance coverage. Rules vary in each state, and you can get the policies under one umbrella. Many insurers with auto insurance policies also have home insurance and other policies you may need.

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 how much gap coverage you need. In most cases, a car owner with a $3,000 gap between the car’s value and loan balance will pay lower premiums than a car owner with a $10,000 gap. A lower gap means less risk for the insurer. The insurance provider will also review your driving record to come up with a rate that accounts for the risk you pose (if any). A good driving record means it’s less likely that your vehicle will be totaled in the future.

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How To Save On Gap Insurance

Gap insurance isn’t the most expensive policy, but it’s also not your only expense. Small costs add up and can strain your budget, which is why it’s important to save every dollar possible. These strategies can help you keep your gap insurance cost low.

Don’t Get Gap Insurance

It’s not for everyone. If you make a 20% down payment or aim to pay the loan within five years, the policy may not make sense for you. The insurance policy only kicks in if your car is totaled while you still have a gap between the loan’s balance and the car’s value. Avoiding accidents protects you from having to rely on gap insurance to get out of a jam. However, the roads are unpredictable, and a reckless driver can accidentally total your vehicle.

Shop Around

The easiest way to save on gap insurance is by avoiding it in the first place. However, some people feel safer on the road with gap insurance. It’s a small expense to pay for an extra layer of financial protection. You can reach out to multiple lenders and insurance providers to find the best policy. Lenders can add a gap waiver to your loan, which serves the same purpose as gap insurance.

Drive Safely

Driving safely can make you feel more at ease on the road and also help with your premiums. Insurers set premiums based on the perceived risk of a policyholder. A clean driving record makes the insurance company feel more confident that you will not get into an accident. Insurance companies do not want policyholders to exercise their premiums. If every policyholder had to exercise their policies, these companies would go out of business. Insurance companies want to keep low-risk policyholders and use a lower premium to attract more of those people.

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Improve Your Credit Score

If you have applied for a loan, your lender likely asked for your credit score or obtained a copy of your credit report. Your credit score impacts your interest rate and how much you can borrow. Surprisingly, insurers also look at this number to determine how much to charge for your gap insurance.

An insurance company doesn’t only measure risk based on your safety record. These companies also consider your ability to make monthly payments on the premiums. A consumer with a low credit score is less likely to keep up with financial obligations, so insurance companies charge higher amounts to these consumers. That may seem counterproductive, but insurance companies want to collect as much upfront cash from these consumers as possible in case they walk away from their policies sooner. Some studies have also connected low credit scores with a higher likelihood of getting involved in an accident or DUI. Those events would trigger the policy, something insurers don’t want.

Insurance companies will charge lower premiums for consumers with higher credit scores. They know consumers with higher credit scores have more options and are less likely to get involved in accidents. Insurers view these policyholders as steady income streams with less risk.

Get Insurance from the Same Company

Some insurance companies offer discounts if you get multiple policies with them. Of course, you should still shop around instead of sticking with the same insurer, but there are benefits to staying with the same company. You can check with your current insurance company about policy bundles and deals. It’s also possible to find another insurance company with better policy bundles than your current provider.

Make a Higher Down Payment

A higher down payment will reduce the gap between the car’s value and loan balance. Building equity in your car decreases the insurer’s risk and can help you secure a lower gap insurance premium. Saving extra money for a down payment can also help you qualify for better loans and score a lower interest rate. You can create a savings account for your down payment proceeds and work on a short-term side hustle to raise additional cash. A higher down payment will also help you get out of gap insurance and debt sooner.

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