Purchasing a brand new vehicle is a big decision that involves more than just heading to the dealership and picking your car off the lot. First, you’ll have to decide how you’re paying for the car, whether you’re paying cash for the vehicle, financing, or leasing. The next step? Deciding on auto insurance.
If your vehicle purchase plans involve leasing or financing, the lender will likely require you to carry full coverage on your new car. This protects their investment if you get into an accident, total the car or it is stolen. Full coverage for a new car typically includes:
- Comprehensive coverage to cover vehicle theft or non-accidental total damage
- Collision coverage for auto accidents
- Liability insurance to cover damage you might cause to someone else’s vehicle
Another kind of insurance coverage that can offer you protection in the event that your car is totaled is gap insurance. In this article we’ll go in depth about what gap insurance is, why it can be beneficial and how to figure out if it’s for you.
Key Takeaways about Gap Insurance
- Gap insurance is different from collision and comprehensive coverage
- Gap insurance covers the difference between what you owe on your vehicle and what it’s worth
- Gap insurance is often best for drivers who have financed or leased their vehicles
- Purchase gap insurance from your insurance carrier rather than the dealer
How does gap insurance work?
When you purchase a brand new vehicle, the vehicle’s value depreciates the second it drives off the lot. Many cars, in fact, lose 20% of their value within the first year of ownership. While most standard auto insurance policies will cover a car’s depreciated value, they probably won’t cover the full amount of your vehicle loan. To help cover the difference between what you owe and what the vehicle is worth, you can purchase gap insurance.
Gap insurance for cars does not cover damage to other vehicles or any costs related to bodily injury. It is exclusively to cover the difference in vehicle value and what you owe on your loan or lease. In addition, gap insurance isn’t a replacement for comprehensive insurance. You still need it even if you have full coverage.
Where to Buy Gap Insurance
You typically have a few options of where to purchase gap insurance. One place you can get it is the car dealership. It will likely be offered to you during the financing conversation, and oftentimes they will let you add it to your monthly payment.
Your auto insurance company, however, can often offer gap insurance at a lower rate than what the dealer charges. Before you agree to purchase insurance from any party, be sure to compare policies from different companies to find the best combination of rate and coverage. At SelectQuote, we can handle this process for you, taking into consideration your coverage needs and budget. In just minutes we can compare coverage from some of the most trusted insurance companies in the nation to find which is right for you.
How much does gap insurance cost?
Gap insurance prices are heavily dependent upon the underwriter, but you can likely expect to pay more if you buy it from your dealership or lender. These costs often range from $500 to $7001, and because it’s usually rolled into your loan amount, you’ll likely pay interest on the policy, too.
If you choose to purchase gap coverage from your insurance company, you can expect to pay an average of $20 to $40 per year2. The cost increase to your comprehensive and collision coverage—which your lender requires anyway—is negligible.
Standalone gap policies are available, too, and often run between $200 and $300, which is still often more affordable than what you can find with the dealership. As always, insurance premiums are dependent upon your credit, driving record, number of total insurance claims, and what your car is worth.
How do I know if I have gap insurance?
Gap coverage typically isn’t offered as part of a standard auto insurance policy, so you’ll need to ask for it. Your lender—either the car dealership’s financial services department or the bank you’ve dealt with—may even require you to purchase it. Remember: buying gap insurance from the dealership will almost always be more expensive than buying it from your insurance company.
Is gap insurance worth it?
If you finance a vehicle with an auto loan or lease, gap insurance is worth it. The amount of your loan is going to be considerably higher than the value of your vehicle once you drive it off the lot, and if your vehicle is totaled, you’ll remain on the hook for the difference.
For example, a vehicle that is financed for $37,000 is driven off the lot and its value immediately depreciates by 20%. If you’re involved in a collision a mile from the dealership and your vehicle is declared a total loss, the insurance payout from your collision coverage will likely only be $29,600. If you can’t afford to pay the remaining balance, it could negatively impact your credit rating, among other financial burdens and consequences.
Do I need gap insurance if I have full coverage?
If you’re financing a vehicle, you should still consider gap insurance even if you have full coverage. It would be worth considering a gap insurance policy if the following describes your vehicle purchase:
- Long-term finance plan (60 months or longer)
- A small down payment, often less than 20% of the amount financed
- Leasing a new car (dealerships typically require gap insurance)
- Faster than average depreciation (sports cars, luxury vehicles)
- Negative equity, such as when you roll over an old car loan into the new one
Gap insurance can help protect you from negative equity in the event that your vehicle is totaled or stolen.
How long does gap insurance last?
You’ll typically only need gap insurance until the balance of your loan falls below the actual appraised value of the vehicle. Some insurers won’t allow you to purchase gap insurance if a vehicle is more than two or three years old. In some cases, it may even expire after that length of time.
Find the Right Auto Insurance Coverage with SelectQuote
When the time comes to purchase your brand new car or dream vehicle, don’t forget to comparison shop for the right amount of insurance coverage for you. Whether you’re looking for lower rates, a comprehensive policy, or gap insurance for your vehicle, we can help.
At SelectQuote, our licensed insurance agents can help you figure out what the right amount of coverage for your budget and needs is and then compare coverage from some of the most trusted insurance companies in the nation to find the one that’s right for you. Get started on your free car insurance quote today.