Gap insurance pays the difference between what your car is worth and what you still owe on the loan if the car is totaled
When you finance or lease a car, you owe more than the car is worth for the first few years. If the car is totaled in an accident, your regular auto insurance pays what the car is worth on that day — not what you owe. Gap insurance covers that gap. Without it, you pay the difference out of pocket, even though you no longer have the car.
Gap insurance is most useful in the first three years of a loan, when depreciation is steepest. It is less useful if you put down a large down payment, pay cash, or lease a car (since leases often include gap coverage). You buy gap insurance from your car dealer, your lender, or an insurance company — not from your regular auto insurer.
Key Takeaways
- Gap insurance only pays if your car is totaled; it does not cover regular collision or comprehensive damage.
- You need gap insurance most in the first two to three years after buying a car with a loan, when you owe more than the car is worth.
- Dealers often sell gap insurance at the time of purchase, but you can also buy it from your lender or an insurance company afterward.
- The cost ranges from $500 to $1,500 one-time, or $10 to $25 per month if financed into your loan.
When you actually need gap insurance
Gap insurance protects you only if your car is declared a total loss by your insurance company. This means the cost to repair it exceeds 70 to 80 percent of its current value — the threshold varies by state and insurer. If you get into an accident and the car is repairable, gap insurance does nothing.
You need it most if you are financing a new car, because new cars lose 20 to 30 percent of their value in the first year. If you borrow $30,000 for a new car and it is totaled six months later, the car might be worth $22,000, but you still owe $29,000. Your collision insurance pays $22,000; gap insurance covers the $7,000 difference.
You do not need gap insurance if you put down 20 percent or more, because you start with equity in the car. You also do not need it if you buy a used car that has already depreciated, or if you pay cash. Leases often include gap coverage automatically, so check your lease agreement before buying it separately.
Where to buy gap insurance and what it costs
You can buy gap insurance three ways: at the dealership when you buy the car, from your lender after you finance it, or from an insurance company. Dealerships sell it most aggressively because they make a commission, and they can roll the cost into your monthly payment so it feels painless. This is also the most expensive route — dealership gap insurance typically costs $500 to $1,500 one-time.
Your lender — the bank or credit union financing the car — can add gap insurance to your loan. This costs less than the dealer, usually $200 to $600, and you pay it monthly as part of your loan payment. Some lenders include it automatically; others charge for it. Call your lender and ask whether gap coverage is already in your loan, and if not, what they charge to add it.
Insurance companies sell gap insurance as a rider to your auto policy, usually for $10 to $25 per month. This is the cheapest option if you buy it within a few months of purchase. After a year or two, as your car depreciates, the gap shrinks and gap insurance becomes less necessary — at that point, canceling it saves money. You cannot buy gap insurance from your regular auto insurer; you need a separate company that specializes in it.
What gap insurance does and does not cover
Gap insurance covers only the difference between what your car is worth and what you owe when the car is totaled. It does not pay for repairs, medical bills, damage to other cars, or liability. It does not cover wear and tear, maintenance, or regular depreciation. It is not a substitute for collision or comprehensive insurance — you need those first.
Gap insurance also does not cover negative equity you created by rolling an old loan into a new one, or by owing more than the car is worth because of poor credit or a very small down payment. Some policies exclude cars modified after purchase, or cars used for commercial purposes like rideshare or delivery. Read the policy language before you buy.
If your car is stolen and not recovered, gap insurance may cover the gap, but theft is usually handled by comprehensive insurance first. If you are in an accident and the car is repaired rather than totaled, gap insurance pays nothing — your collision insurance handles it. Gap insurance only pays when the insurer declares the car a total loss.
How to file a gap insurance claim
If your car is totaled, file a claim with your regular auto insurance first. Your collision or comprehensive coverage will pay what the car is worth. The insurance company will give you a settlement letter stating the car's value and the amount they are paying. Keep this letter.
Next, contact your gap insurance provider — the dealer, lender, or insurance company where you bought it. Give them the settlement letter from your auto insurer, your loan payoff statement from your lender, and proof of the total loss. The gap insurer will calculate the difference and pay it directly to your lender, not to you. This pays off the remaining loan balance so you do not owe money on a car you no longer own.
The entire process usually takes two to four weeks after your auto insurer declares the car a total loss. During this time, stay in touch with your lender to make sure they receive the gap payment. If the gap insurer pays less than the remaining balance, you are responsible for the difference — this happens rarely, but read your policy to understand what it covers.
Deciding whether gap insurance makes sense for you
Gap insurance is worth buying if you are financing a new car with less than 20 percent down, or if you are financing a used car that is still depreciating quickly. It is also worth buying if you live in an area with high accident rates or if you drive a long commute. The cost is small compared to the risk of owing thousands on a car you no longer own.
Gap insurance is not worth buying if you are paying cash, putting down 20 percent or more, buying a used car that is already several years old, or leasing (since leases usually include it). It is also not worth buying if you plan to keep the car for many years, because the gap closes as the car depreciates and you pay down the loan. After three to five years, the gap is usually gone and gap insurance becomes unnecessary.
Compare the cost of gap insurance to the risk. If gap insurance costs $15 per month and you owe $8,000 more than the car is worth, the insurance pays for itself if the car is totaled within 53 months. If you plan to keep the car longer than that, or if the gap is smaller, the math may not work in your favor.
Frequently Asked Questions
Can I buy gap insurance after I have already bought the car?
Yes, but it is cheaper to buy it within the first few months. Insurance companies will sell it to you as long as you still owe more than the car is worth and the car has not been in an accident. After a year or two, as the gap shrinks, fewer companies will sell it to you. Call your lender or an insurance company to ask if they still offer it.
Does gap insurance cover me if I am in an accident but the car is not totaled?
No. Gap insurance only pays if the car is declared a total loss by your insurance company. If the car is repairable, your collision insurance covers the repair, and gap insurance does nothing. You need collision insurance regardless of whether you have gap insurance.
What happens if gap insurance pays less than what I owe?
You are responsible for the difference. This is rare, but it can happen if you owe significantly more than the car is worth, or if the gap insurer disputes the total loss value. Read your policy to understand the maximum it will pay. Some policies cap the payout at a certain amount or percentage of the car's value.
If I pay off my loan early, should I cancel gap insurance?
Yes. Once you own the car outright, there is no gap between what you owe and what it is worth, so gap insurance is useless. Call your gap insurer or lender and ask how to cancel. If you financed it into your loan, you cannot cancel it, but you can stop paying for it once the loan is paid off.
Does gap insurance cover a car I am leasing?
Most leases include gap coverage automatically, so you do not need to buy it separately. Check your lease agreement or call your leasing company to confirm. If your lease does not include it and you want it, you can buy it from an insurance company, but this is rare because leases already protect you from owing money on a car you do not own.