Gap insurance — short for guaranteed asset protection — is for drivers with a loan on a newer vehicle. If your car is stolen or totaled, standard car insurance typically only pays what the car is worth at that moment. If you owe more than that current value, gap insurance helps pay the difference so you aren't left paying for a car you can no longer drive.
How does gap insurance work?
Vehicles typically lose about 20% of their value in the first year alone, often leaving buyers with negative equity on their loans. If your car is declared a total loss, a standard policy typically pays the actual cash value (ACV) — what the car is worth today — rather than what you originally paid or currently owe. Gap insurance helps cover that financial shortfall.
For example, if you owe $25,000 on your loan but your car’s ACV is $20,000, your insurer will pay you the latter amount. That leaves you with a $5,000 balance on your loan that you’re still responsible for paying. Gap insurance can help cover that balance.
Gap coverage does not stand alone, however. You must carry collision and comprehensive coverage, often called full coverage, for gap insurance to apply.
Also, you may need to consider your deductible. Most gap insurance policies do not cover your deductible, meaning you would still owe that amount. So in the example above, if the car’s ACV is $20,000 and your deductible is $1,000, your insurer would pay you $19,000, which leaves a $6,000 balance.
Gap insurance may or may not cover your deductible in addition to the “gap” — it depends on your policy terms. Review your policy documents carefully or speak with an agent to determine what you’re responsible for paying out of pocket.
What does gap insurance cover?
Gap insurance applies in specific instances tied to a total loss. Coverage typically includes:
- Total loss from a covered accident: If your vehicle is declared a total loss and you owe more than its ACV, gap insurance helps pay the remaining loan or lease balance after your insurer’s payout is applied.
- Theft of the vehicle (if not recovered): Your comprehensive coverage will pay out the vehicle’s market value. Gap insurance will help cover the rest.
- Negative equity: If you financed your car with a small down payment, rolled over debt from a previous loan, or chose a long repayment plan, you may owe more than the car is worth. Gap insurance protects you from paying that difference out of pocket after a total loss.
What does gap insurance not cover?
Gap coverage is limited to situations where your car is a total loss. It does not cover everyday vehicle expenses or other costs, including:
- Mechanical breakdowns or engine failure: Gap insurance is not a warranty and does not pay for repairs or maintenance issues.
- Overdue loan payments or late fees: If you’ve fallen behind on payments, gap coverage will not cover past-due amounts, penalties, or interest charges.
- Extended warranties or add-ons rolled into the loan: If you financed extras such as service contracts, those balances may not be covered.
- Car repairs: Gap insurance only applies if your car is a total loss. It does not pay for partial damage or repair bills.
- Down payments on a replacement car: Gap insurance pays off the remaining balance on your totaled car, but does not provide funding for a new down payment.
Who needs gap insurance?
Gap insurance can be especially valuable if you owe more on your vehicle than it’s worth, particularly in the first few years of ownership. Drivers who make a low down payment, for example, may find themselves with negative equity after purchasing a car. Long loan terms, such as 60 months or more, increase the likelihood of this situation because equity builds more slowly.
Gap coverage can also be helpful if you purchase a vehicle that depreciates quickly, or if you rolled negative equity from a previous loan into your current financing. In those cases, you may start out owing significantly more than the car is worth.
Alternatively, if you lease a vehicle instead of purchasing it, the leasing company sometimes requires gap coverage.
Note that if you made a substantial down payment or are paying your loan off quickly, gap insurance may only be necessary in the short term. Once your loan balance drops below the car’s current market value, it typically makes sense to drop gap insurance.
Where to buy gap insurance: Dealer vs. insurance company
Gap insurance is usually available from two sources: the dealership where you purchased or leased your vehicle and your auto insurance company.
Dealerships often sell gap insurance for a flat fee, which may be rolled into your loan. While convenient, it’s important to understand that means you would be paying interest on it. Find out exactly how much the dealer intends to charge for coverage and consider the interest implications before agreeing to secure coverage through a dealer.
Auto insurers generally offer gap insurance as an optional add-on (called an endorsement) to your existing coverage. Typically, gap policies from private insurers cost less than dealerships charge. Plus, they provide the flexibility to remove gap coverage once it’s no longer needed.
Gap insurance for used cars
Gap insurance for used cars may be available if the vehicle meets certain criteria. Insurers are more likely to cover a car that is less than three years old, and you may need to be the first or second owner. Eligibility requirements vary, so confirm availability before financing a used vehicle.
Pros and cons of gap insurance
Pros
- Prevents out-of-pocket debt after a total loss: If your car is totaled and you owe money on the loan or lease, gap insurance can help pay the remaining balance.
- Provides peace of mind early in your loan: It protects you during the early years of your loan when negative equity is most likely.
- Affordable through insurers: When added to an existing policy, gap insurance cost is typically modest compared to dealership pricing.
Cons
- It’s an extra cost: Gap insurance adds to your overall vehicle expenses.
- It becomes unnecessary over time: Once your loan balance drops below your car’s ACV, gap insurance isn’t necessary.
- Does not cover everyday repairs: Gap insurance only applies in total loss situations, not for mechanical breakdowns or routine damage.
Frequently asked questions
Is gap insurance required by law?
Gap insurance is not required by law in any state. However, your lender or leasing company may require it as part of your financing agreement. Because lenders have a financial interest in the vehicle, they may require coverage to protect that interest.
How long do I need gap insurance?
Generally, you only need gap insurance while you owe more on your loan or lease than the car is worth. For most drivers, that is during the first two or three years of financing. Once your loan balance drops below the car’s ACV, you can cancel your gap insurance.
Can I get a refund for gap insurance?
You may be eligible for a refund if you paid for your gap insurance upfront to your car dealer, and then sell, refinance, or pay off your vehicle early. To request a refund, you will need to contact the dealer or insurance provider directly and provide documentation showing the loan was paid off or refinanced. Refund policies vary, however, so review your contract carefully.
Does gap insurance cover my car if it's stolen?
Yes, if your vehicle is stolen, not recovered, and declared a total loss by your insurer. In that case, your comprehensive coverage pays the car’s current depreciated value, and gap insurance will help cover the remaining balance on the loan or lease. If the car is stolen and then recovered and repaired, gap insurance does not apply.
Will gap insurance pay for my deductible?
That depends on your policy. Review your terms carefully to understand how your deductible is handled.
How long does gap insurance last?
Gap insurance may last for the term of your auto loan or lease, but it remains active only as long as you carry collision and comprehensive coverage. If you purchase gap coverage through a dealership, it typically applies for the term of the original loan unless you cancel it. When added to an existing auto insurance policy, it stays in effect until you remove it from your policy. Many drivers choose to cancel their gap insurance once their loan balance drops below the vehicle’s current market value.
