What is Gap Insurance, and Who Needs It?

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Cars depreciate fast. That’s part of the reason gap insurance exists.

A car starts to lose value the moment it leaves the lot —  as much as 20% in the first year, according to the Information Insurance Institute (III). Gap insurance covers the difference between what your vehicle is currently worth and the amount you actually owe on it.

It’s a niche product, and it doesn’t make sense for everyone. It’s mainly geared toward people who would have trouble paying off their auto loan or lease if their new car were badly damaged, totaled, or stolen. 

“If people have the unfortunate luck of buying a new car, and getting in a terrible accident, it works out,” says Douglas Heller, an independent consultant and insurance expert at Consumer Federation of America, an association of nonprofit organizations designed to advance consumers’ interests. 

“But on average, it’s a bad deal for consumers,” says Heller.

Here’s what to consider before buying gap insurance, and how you can get it for cheaper if you do decide to buy.

What Is Gap Insurance?

Gap insurance, also known as guaranteed auto protection, is an optional type of insurance that reimburses you if you owe more on the car than what it’s worth in the event of a serious incident, like theft or a total loss. (The latter is what happens when the cost of repair exceeds the car’s value.)

“It says, should I have an accident in this car and it’s totaled and I owe more than it’s worth, the gap insurance will pay the difference,” says John Miller, Jr., president of The Adcock Agency, an insurance company based in North Carolina. “There are a lot of people who buy far more car than they ever need or can afford.”

Here’s an example of how gap insurance works: You bought a brand new car for $30,000 two years ago, and still owe $25,000 on your auto loan when the car is totaled in a covered collision. The car is now only worth $20,000 on the market, so your collision coverage pays you up to that amount — the car’s actual cash value.

If you don’t have gap insurance in that situation, you would have to pay $5,000 out of your own pocket to pay off your auto loan on the totaled car. If you have gap insurance, your insurer would pay that difference.

When Does It Make Sense to Get Gap Insurance?

According to III and experts we spoke to, it might make sense to get gap insurance for a new car only if you:

  • Made less than a 20% down payment
  • Financed for 60 months or longer
  • Leased your car (carrying gap insurance is generally required for a lease)
  • Bought a car that has a history of depreciating quickly
  • Rolled over negative equity from an old car loan into the new loan
  • Drive a lot, making the car’s value depreciate more quickly.

“If you’re financing the vast majority of a car and you’re planning to keep it for more than two to three years, I would highly recommend gap insurance because chances are you’re going to be underwater very quickly,” says Miller. 

How Much Does Gap Insurance Cost?

Gap insurance isn’t usually as expensive as broader coverages like comprehensive insurance or liability insurance, says Miller. 

On most auto insurance policies, III says gap insurance with collision and comprehensive coverage adds about $20 a year to the annual premium. If you buy gap insurance from a car dealership, expect it to cost a few hundred dollars. “You only buy it once at the dealership — it’s not an annual renewal,” says Miller.

But the cost ultimately depends on the current actual cash value of the car, your age, the state you live in, and any previous car insurance claims. 

“A $30,000 policy is going to be far less expensive than a $100,000 policy,” says Miller.

If you’re interested in reducing your car insurance costs, avoiding gap insurance you don’t need is a simple way to save some money. This is especially true if you owe less on your car than its actual cash value.

“The data from the industry show that something like every $100 in [gap insurance] premiums that people pay, the insurance company pays out $30 to $40. That’s a very low percentage, which tells me it gets used a lot less than an insurance product should be used,” says Heller.

Pro Tip

If you’ve purchased gap insurance, check your loan balance occasionally to see if it’s time to cancel. Once you owe less than the car’s actual cash value, you no longer need gap insurance. You can find out your car’s current value through Kelley Blue Book or Edmunds.

Is Gap Insurance Worth It?

It’s likely that your car dealer will try to sell you its own gap insurance, but if you decide you want it, shop around.

“The vast majority of people tend to buy it at the dealership and at the time of purchase,” says Miller. 

If a lender says you’re required to buy gap insurance to get financing, that’s a red flag, according to the Consumer Financial Protection Bureau. Lenders rarely require that and if the car dealer says otherwise, the bureau says you should reach out to the lender yourself to find out if that’s true and ask for a copy of your sales contract to see if it says it’s required.

Most car insurers also offer gap insurance, and they typically have better prices than the dealer. If your auto insurance company sells gap insurance, Heller suggests talking to them first.

“I don’t recommend [gap insurance], but if you feel you need to buy it then you should shop around and not just take what the car dealer wants to sell you,” says Heller. “Don’t assume that the deal the auto dealer is offering on gap insurance is going to be the best deal out there for you. It’s most certainly not.”