What to Know Before Buying Gap Insurance for Your Car

When purchasing or leasing a vehicle, most car buyers are familiar with standard auto insurance coverage, like liability, collision, and comprehensive insurance. However, gap insurance is an often overlooked yet crucial form of coverage that can protect you financially if your car is totaled or stolen.

What Is Gap Insurance?

Gap insurance (Guaranteed Asset Protection) is a type of auto insurance that covers the “gap” between what you owe on your car loan or lease and the actual cash gap insurance for cars value (ACV) of your vehicle at the time it’s totaled or stolen.

In the event that your car is in an accident or stolen, your regular auto insurance policy will reimburse you for the ACV of your car—this is typically the market value of the vehicle at the time of the loss, factoring in depreciation. However, because cars lose value rapidly—sometimes as much as 20% or more in the first year alone—the payout from your standard insurance may not be enough to cover the amount you owe on your loan or lease. This is where gap insurance comes in.

How Does Gap Insurance Work?

Let’s break it down with an example:

You purchase a new car for $30,000 and finance it with a loan.
After one year, the car’s market value has dropped to $22,000 due to depreciation.
If the car is totaled in an accident, your auto insurance will pay you the car’s ACV of $22,000.
However, you still owe $25,000 on your loan.

Without gap insurance, you would be left with a $3,000 balance to pay off, even though the car is no longer in your possession. But with gap insurance, the remaining $3,000 would be covered, ensuring you don’t have to pay out-of-pocket for a car you no longer have.

Who Needs Gap Insurance?

New Car Buyers: New cars depreciate quickly. In fact, a new car can lose up to 20% of its value in the first year. If you are financing a new car, you may owe more than the car is worth early in the loan, making gap insurance a smart protection to have.
Leasing a Car: Many car leasing companies require gap insurance. Since leased cars also lose value rapidly, gap insurance ensures that if the vehicle is totaled or stolen, you’re not left owing more on the lease than the car’s value.
Low Down Payments or Long-Term Loans: If you made a low down payment on your car or took out a long-term loan (e.g., 60 months or more), there’s a higher chance that you’ll owe more on the vehicle than it’s worth early in the loan term. Gap insurance can cover this difference if the car is lost.

How Much Does Gap Insurance Cost?

Gap insurance is generally quite affordable. It typically costs between $20 and $40 per year when added to your existing auto insurance policy. Some dealerships offer gap insurance at the time of purchase or lease, but this option can often be more expensive.

Is Gap Insurance Worth It?

If you’re financing or leasing a vehicle—especially a new car—gap insurance is a valuable option. It’s a low-cost way to protect yourself from the financial strain of owing more than the car is worth in the event of an accident or theft.

In conclusion, gap insurance offers essential protection for car buyers and leasers, covering the difference between what you owe and your car’s actual value in the event of a total loss. If you’re financing or leasing a car, it’s definitely worth considering to protect yourself from financial loss.