What is gap insurance and what does it cover?

A woman takes notes in her notebook on what gap insurance is

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

Gap insurance is another kind of insurance coverage that can offer you protection in the event that your car is totaled. 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.

How does gap insurance work?

It’s common knowledge the value of a brand new car decreases as soon as you drive it off the lot. In fact, it’s estimated that most cars lose 20% of their value within the first year of ownership.1 Most auto insurance policies cover the depreciated value of a car, but they typically won’t cover the full amount of your auto loan. You can account for this difference in coverage by purchasing gap insurance. 

Gap insurance specifically covers the difference in vehicle value and the amount you owe on your loan or lease—it does not cover damage to other vehicles or other costs like bodily injury. While it’s not a replacement for comprehensive insurance, gap insurance can offer valuable additional protection. In this article, we’ll walk you through the details of purchasing gap insurance so you can decide if it makes sense for you.

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 typically 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 costs vary depending on where you purchase the policy. However, it’ll typically be more expensive if you buy it through your car dealership or lender, with the cost ranging from $200 to $500 per year. This amount is usually rolled into your loan, so you’ll probably pay interest on the policy as well. 

You may also choose to purchase gap insurance through your auto insurance carrier. This cost will vary as well, but on average runs around $40 to $60 per year. A third option is to purchase a standalone gap policy, which typically costs around $300 a year. Keep in mind that your insurance premiums depend on many factors, like your credit, zip code, driving history, number of claims you’ve filed and even the make and model of your car.

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 new vehicle that is financed for $37,000 driven off the lot will see its value immediately depreciate by 10%. 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 $33,300. 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 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

If you’re planning to buy a new vehicle, purchasing or updating your auto insurance is an important part of the process. SelectQuote’s experienced licensed insurance agents can answer any questions you have about gap or comprehensive insurance coverage for your new car. We search highly-rated insurance carriers in just minutes, finding you unbiased quote comparisons so you can find the right policy for your needs and budget.

  1. https://www.kbb.com/car-advice/how-to-beat-car-depreciation/

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