Gap Insurance for Used Cars (2023)

Buying a used car is a great way to save money and get a good deal on a vehicle. But what if your used car gets totaled, and you still owe money on it? That’s where gap insurance comes in — it covers the difference between what you owe on your loan and the actual cash value of your vehicle.

However, it doesn’t replace auto insurance. If you’re looking for a car insurance policy, Insurify is your one-stop shop to search and compare insurance quotes. So, when searching for insurance rates, is gap insurance for used cars worth the cost? Let’s find out.

Gap Insurance for Used Cars

The “gap” in gap insurance stands for “guaranteed asset protection.” It’s a type of auto insurance that activates in the event of a total loss to cover the difference between what you owe on your car and what it’s worth.

It’s typically optional coverage. However, your lender may require you to purchase it if you lease or finance your vehicle, whether buying a used car from a dealership, auction, or private party. It’s especially helpful if you buy a car, truck, or SUV that depreciates at a faster rate than normal, like luxury sedans or SUVs.

Gap insurance protects you in case of a total loss after an accident or theft. Rather than paying out of your own pocket, your policy can cover your loan balance after the insurance company issues the claim payout.

Gap Insurance 101

It’s common for motorists to owe more than their cars are worth in the first year or two after buying a vehicle. That’s because the value of the car depreciates over time. While new cars typically lose their value more quickly than used cars, most depreciate 20% per year, according to the Insurance Information Institute (Triple-I).

For example, suppose you bought a used Toyota Corolla from a dealership. You finance the car with no down payment and leave the dealership with a five-year $22,500 auto loan. Your monthly payment is $375, and you’ve paid $4,500 after 12 months. You still owe $18,000. Then, you’re in an accident, and the insurance company totals your car.

If your car depreciates at an expected 20%, your car’s value is $18,000 — so you break even. But what if your car depreciates faster than average? Suppose it depreciated 30% since you bought it. Now, the car is only worth $15,750. Instead of you paying the $2,250 difference, your gap insurance picks up the tab, and you walk away with a $0 balance.

What Gap Insurance for Used Cars Covers

Gap insurance covers things other policies won’t. For example, your lender may require you to buy full coverage (liability, comprehensive, and collision insurance) if you finance your used car. This covers the cost to repair or replace your vehicle if you’re in an accident and your car is totaled.

Even the best car insurance only pays your car’s depreciated or “fair market” value. It typically relies on a metric like Kelley Blue Book to determine the vehicle’s worth. The car’s actual cash value (ACV) may not be enough to pay off how much you still owe on your loan. But that’s where gap insurance can step in to cover the difference.

However, it doesn’t cover:

• Missed loan payments due to financial hardship, disability, or loss of job

• Vehicle repairs or maintenance

• Rental car fees while your car is in the shop

• Extended warranties

• Insurance policy deductible costs

Who Needs Gap Insurance

Gap insurance isn’t something everyone needs. It’s only necessary if you’re financing or leasing your car. It’s common when you’re buying a new vehicle but can come in handy when buying a used car, too.

Used car gap insurance may make sense if:

• You put no money down on a car (or made a small down payment).

• You rolled negative equity from an old car loan into your new loan.

• You choose a loan term with a long payoff period.

• The luxury sedan or SUV you bought depreciates more quickly than normal.

You might consider skipping gap insurance if:

• You put at least 20% down when you bought your vehicle.

• You plan to pay off the car in less than five years.

• The vehicle historically holds its value better than average.

Keep in mind that you won’t need gap insurance forever. It’s best only when your loan balance exceeds the car’s value.

How Much Gap Coverage Costs

The cost of gap insurance largely depends on where you buy the policy. You can add coverage to your regular auto insurance premium for $20 more per year, according to Triple-I. Some companies offer it as a stand-alone policy for about $300 per year. However, you might pay as much as $500 to $700 if you buy gap insurance from a lender.

Where to Buy Gap Insurance

Gap insurance is available when you first purchase your vehicle. However, you don’t always have to buy gap insurance right away. If you aren’t sure whether you need it, you may be able to purchase a policy within three years of buying your vehicle. Here’s where to look for a policy.

Dealership or Lender

Gap insurance from the car dealership or lender can seem like a convenient way to buy coverage. However, it’s usually the most expensive option. Besides paying more for the policy, you also pay interest on the cost because it’s rolled into your loan payments.

Car Insurance Company

Many auto insurance companies offer gap coverage as an add-on to your car insurance policy. For example, you can buy a policy from some top providers, such as Travelers, Nationwide, Liberty Mutual, and Allstate.

Gap Insurance Provider

If you’re looking for gap insurance, you may consider stand-alone coverage. Companies like Gap Direct offer coverage that isn’t tied directly to your loan or car insurance policy. However, Gap Direct isn’t accepting new applications at the time of this writing. Instead, it recommends buying a policy from your lender, dealer, or insurance company.

Alternatives to Gap Insurance

You might not qualify for gap insurance on your used car — your car may be too old, or perhaps you waited too long after buying the vehicle to get a policy. In either case, alternatives to gap insurance are available.

• Loan/lease payoff coverage is like gap insurance, but the payoff is often limited to no more than 25% of the value of your car.

• New car replacement is usually for newer vehicles less than three years old. It can pay you the value of a new car of the same make and model as your old car.

You also can pay off your vehicle in full. If you don’t have a car loan, you don’t need gap insurance.

Final Thoughts: Is gap insurance worth it?

If you’re in the market for a used car, gap insurance is a great way to protect your investment. It can cover the difference if your car is a total loss and you owe more on it than it’s worth.

It isn’t always the best option for used cars because they depreciate more slowly. But gap coverage can be worth it if you buy a car less than three years old, put less than 20% down, or roll negative equity into your new loan.

References

1. https://www.iii.org/article/what-gap-insurance. Insurance Information Institute.