What is gap insurance? Definition, How it Works, and When to Buy

What is gap insurance?

Gap insurance is a sort of auto insurance that you may acquire to protect yourself in the event that you lose your vehicle and the settlement you receive does not entirely cover the amount owed on your finance or lease agreement. If the sum on your auto loan exceeds the vehicle’s book value, gap insurance might help pay the difference.


  • Gap insurance covers the gap between the value of your vehicle and the amount owed on your auto loan or lease.
  • Gap insurance is useful if you owe more than the vehicle is worth, such as if you did not make a down payment or selected a lengthy loan term.
  • The cost of gap insurance varies by state, driving record, and vehicle.
  • You may be able to add gap insurance as an endorsement to your auto insurance policy or purchase separate coverage from the dealer. It may be worth comparing the pricing of both choices to see which is the greatest match for your requirements.

How does gap insurance work?

It is fairly uncommon to owe more on a car loan than the vehicle is worth, particularly because autos depreciate fast. Carfax research shows that the typical automobile depreciates by 10% within the first month of ownership.

If your automobile is wrecked, your insurance company will compensate you based on the actual worth of the vehicle after depreciation—not the price you bought for it, the cost of a new one, or the amount owed on your loan or lease agreement. This is where gap insurance comes in.

For example, suppose you purchased your automobile two years ago and owe $20,000 on your loan arrangement. However, owing to depreciation, your vehicle’s real cash worth is $15,000. If your automobile is fully written off due to an accident or theft, your auto insurance coverage will pay you $15,000. You may apply the $15,000 to your automobile loan, but you will still be $5,000 short of what you owe, despite the fact that you no longer own a vehicle.

If you have gap insurance, it will cover the $5,000 “gap,” which is the difference between the amount you get from the refund and the amount you still owe on the automobile.

Examples of When to Consider Gap Insurance.

  • You financed an automobile with little or no down payment. Without a substantial down payment, you’ll be over financially on your vehicle loan the minute you drive off the lot. It may take many years for the loan amount and the car’s real cash worth to balance.
  • When you trade in an upside-down automobile, the dealership will add the amount you still owe to the loan balance of the new car unless you pay the difference up front. This additional amount may come back to haunt you if your vehicle is wrecked or stolen.
  • You intend to drive a lot: Few things diminish the value of an automobile quicker than frequent driving. The more miles you drive, the quicker your car’s value depreciates, and it’s probable that you’ll be losing value faster than your payments can keep up.
  • You took out a vehicle loan for a lengthy time (greater than 60 months). A long-term loan takes longer than typical to reach the break-even point, which occurs when the loan amount and the value of the automobile begin to equalize.

Do I need gap insurance?

Gap insurance may be a suitable option if you did not make a significant down payment when financing your automobile or if you intend to use it in a manner that would rapidly reduce its resale value, such as taking frequent long road trips or exploring difficult roads. It may also be a viable alternative if you took out a vehicle loan with a term more than five years.

Is gap insurance mandatory?

Gap insurance is not necessary, although it may be needed by your financing arrangement. It is a good idea to thoroughly study the conditions of your auto loan to determine if you need gap insurance. If you’re leasing a vehicle, you may need to get gap insurance.

How Much does Gap Insurance Cost?

As with any auto insurance, your premiums may vary depending on your state, driving record, age, vehicle, and other variables. Your insurer may be able to add gap insurance as an endorsement to your existing plan.

Car shops may also provide gap insurance, albeit it may be more costly than adding this coverage to your current auto insurance policy.

The Bottom Line

Gap insurance is an optional form of automobile insurance that covers the gap between a car’s real cash worth and the remaining loan or lease debt. In the event of a complete loss, gap insurance pays the “gap” between the amount covered by the driver’s auto insurance policy and the amount owed on their financing.

  1. Progressive. “What Is Gap Insurance?
  2. Carfax. “Car Depreciation: How Much Value Does a Car Lose Per Year?
  3. Insurance Information Institute. “What Is Gap Insurance?
  4. Nationwide. “Gap Insurance.”

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