Gap Insurance: How It Works and When It’s Worth It

Gap insurance covers the difference between your insurance payout and what you owe on a financed vehicle. If you lease or finance a car, gap insurance helps protect you financially if your car is totaled.

Melanie Lockert
Written byMelanie Lockert
Melanie Lockert
Melanie Lockert
  • 10+ years writing on personal finance topics

  • Host of the Mental Health and Wealth podcast

Melanie is a blogger, author, and speaker specializing in personal finance and debt management. She’s also the author of the blog and book “Dear Debt.”

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Sarah Archambault
Sarah Archambault
  • Experienced personal finance writer

  • Background working with banks and insurance companies

Sarah enjoys helping people find smarter ways to spend their money. She covers auto financing, banking, credit cards, credit health, insurance, and personal loans.

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Konstantin Halachev
Data reviewed byKonstantin Halachev
Headshot of Konstantin Halachev, VP of Engineering at Insurify
Konstantin HalachevVP of Engineering & Data Science
  • 7+ years experience in data analysis

  • Ph.D. in Computational Biology

Konstantin has led data teams across multiple industries, including insurance, travel, and biology. He’s led Insurify’s engineering team for more than three years.

Updated July 18, 2024

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Guaranteed asset protection, more commonly known as gap insurance, is an optional type of auto coverage. Gap insurance covers the difference, or gap, between what you owe on an auto loan and your insurance reimbursement when your car is totaled or stolen.

Gap coverage protects you financially and is useful for auto loan borrowers who have recently financed a vehicle. Not all lenders require gap coverage, but if you lease your vehicle, you’ll likely need this coverage.[1]

Find out more information and see if gap insurance is right for you.

Quick Facts
  • You can generally include gap insurance in your monthly loan payments.

  • You can cancel gap insurance once you owe less on your loan than your car’s value.

  • Gap insurance is available from dealers, financial institutions, and your auto insurer.

How gap insurance works

Gap insurance helps protect you financially from depreciation. It covers the difference between your collision or comprehensive insurance payout and the balance on your auto loan after vehicle theft or total loss. Without gap protection, you could be liable to pay the loan balance on a car that you can’t use anymore.

Buying a car is a significant investment, and relying on auto financing is common. The Consumer Financial Protection Bureau estimates that more than 100 million Americans had an auto loan in 2022.[2] But your vehicle begins depreciating, or losing value, the minute you drive it off the lot.

Your insurer’s payout is based on the vehicle’s market value, not what you owe on the loan. So an insurance payout (minus your deductible) might not be enough to cover your loan balance, leaving you to pay out of pocket for anything left on your loan.

But with gap insurance, if your vehicle is a total loss, gap insurance will help you pay the difference between your payout and the loan amount. So, instead of paying out of pocket for the rest of the loan, you’re protected.

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Gap insurance example

Here, you can see an example of how gap insurance works after a total loss, with the actual cash value, outstanding loan amount, insurance deductible, and how much gap insurance would cover or what you might need to pay out of pocket.

 Without Gap InsuranceWith Gap Insurance
Vehicle actual cash value$15,000$15,000
Outstanding loan amount$20,000$20,000
Insurance deductible$1,000$1,000
Insurance payout (vehicle value minus deductible)$14,000$14,000
Loan amount after insurance$6,000$6,000
How much gap insurance covers$0Up to $6,000 of the remaining loan balance
Out-of-pocket costs$6,000$0
Disclaimer: Table data sourced from real-time quotes from Insurify's 50-plus partner insurance providers. Actual quotes may vary based on the policy buyer's unique driver profile.

Is gap insurance worth it?

Gap insurance is worth it if you’ve taken out an auto loan to buy a new or used car. If you lease your vehicle, the lender may require you to carry gap insurance. Keep in mind that cars depreciate faster than some other assets — sometimes up to 20% in the first year of ownership — so having gap insurance can help protect your investment.[3]

Some situations where it makes sense to get gap insurance coverage include:[4]

  • You made a small down payment (less than 20%).

  • Your repayment term is 60 months or more.

  • Your lease agreement requires it.

  • You have negative equity.

  • Your car’s make or model year depreciates faster than others.

When gap insurance isn’t worth it

Gap insurance is helpful in very specific situations — when your loan amount is greater than what your car is worth or when your lender requires gap coverage. But gap insurance isn’t typically worth it in the following situations:

  • You’ve paid for your vehicle outright in cash.

  • You made a significant down payment (20% or more) when financing your vehicle.

  • Your loan balance is less than the vehicle’s current value.

Insurify Tip

You can drop gap insurance when your auto loan amount is lower than the current actual cash value of your car, considering depreciation. This can help you save on premiums. Talk to your lender or insurance company about when it makes sense to cancel gap coverage.

What gap insurance doesn’t cover

Gap insurance typically provides protection when your vehicle is a total loss. But gap insurance usually doesn’t cover many other situations, such as:

  • Damage to your vehicle if it’s not deemed a total loss

  • Your down payment for a new car

  • Economic hardship and difficulty making loan payments

  • Rental car costs

  • Your deductible

  • Interest charges or penalties on the loan

Gap insurance vs. full coverage

Full-coverage car insurance consists of various coverage types rolled into one package. This includes the state-required liability, collision, and comprehensive coverage and costs an average of $214 per month in the U.S., or $2,572 per year.

Liability insurance protects you by paying for any injuries to another driver and damage to another driver’s car. Collision insurance provides payment for damages to your car for collision-related incidents, whereas comprehensive coverage pays for damages or losses related to non-collision incidents, such as fire, floods, and theft.[5]

Gap insurance protects you in case of a total loss where your auto loan exceeds the car’s value. This pays the rest so that you’re not on the hook for the remaining loan. You may add gap insurance to a full-coverage policy.

While gap insurance often increases costs, it’s typically only a small bump in your rate. Below is a look at the rate differences of various insurance companies for full-coverage costs with gap insurance.

Insurance CompanyAnnual Cost: Full CoverageWith Gap Insurance
USAA$1,201$1,231
State Farm$1,380$1,410
GEICO$1,428$1,458
Allstate$1,668$1,698
Progressive$1,752$1,782
American Family$2,088$2,118
Nationwide$2,232$2,262
Travelers$2,376$2,406
Liberty Mutual$2,400$2,430
Farmers$2,988$3,018
The General$3,003$3,033
Disclaimer: Table data sourced from real-time quotes from Insurify's 50-plus partner insurance providers. Actual quotes may vary based on the policy buyer's unique driver profile.

Where to buy gap insurance

Gap insurance, which is sometimes referred to as loan or lease gap coverage, is available to purchase in multiple places. When you buy a new vehicle, the car dealership may offer you gap coverage if you’re financing through them. This add-on coverage is then added to your total loan amount.

Often, you can decline the dealer’s gap coverage and obtain a gap policy through your current auto insurance company, which can help you save on total costs. In addition, gap coverage is often available from your auto lender. For example, if you get an auto loan from a credit union, you likely can get gap insurance tacked onto your monthly payment or for a one-time fee.

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How much does gap insurance cost?

The cost of gap insurance depends on where you buy it. Here are estimated costs from various gap insurance sources:

  • illustration card https://a.storyblok.com/f/162273/x/94dcf3f967/lender-requirement.svg

    Auto loan company

    Buying gap insurance from an auto loan company can cost $500–$700. Your auto lender may offer gap coverage as “loan forgiveness” coverage. For example, State Farm includes it as Payoff Protector in its auto loans.

  • illustration card https://a.storyblok.com/f/162273/150x150/55b61a5856/jobs-and-professions-96x96-green_017-businessman.svg

    Your current auto insurer

    If you purchase gap insurance from your current insurer when you first buy an auto insurance policy for your new car, it’s typically $20 per year for coverage. Many of the best car insurance companies offer gap coverage as an option.

  • illustration card https://a.storyblok.com/f/162273/150x150/e4caf71395/car-sharing-96x96-orange_040-shield.svg

    As a stand-alone policy

    Although it’s not common, you may be able to purchase gap insurance from a company separate from your auto insurer, which can cost a one-time fee of $200–$300.

Gap insurance FAQs

If you’re planning to finance a vehicle with an auto loan, you might consider gap insurance. Here’s some additional information about gap insurance policies.

  • How long does gap insurance last?

    Gap insurance lasts the length of your auto insurance policy. You can choose to remove coverage once your loan amount is lower than your car’s value.

  • Is gap insurance required?

    Your state or insurance company typically won’t require gap insurance. But if you finance or lease a new car, some lenders may require it. Even when not required, consider gap insurance if your car loan exceeds your vehicle’s actual cash value.

  • How does gap insurance work if your car is totaled?

    If your insurer considers your vehicle a total loss, gap insurance will pay the difference between the actual cash value the company pays out and the balance on your auto loan.

  • When does gap insurance not pay?

    Gap insurance doesn’t cover situations in which the car isn’t a total loss. Furthermore, some gap insurance policies may pay out only a certain portion of the vehicle’s actual cash value or have a cap on how much they’ll cover.

  • Does gap insurance cover a blown engine?

    Gap insurance doesn’t cover mechanical breakdowns, like a blown engine, or normal wear and tear damage. Gap insurance pays the difference between what your car is worth and the balance owed on an auto loan in the event of a total loss from a comprehensive or collision claim.

  • How can you find out if you have gap insurance?

    Review your lease agreement or sales contract to see if you have gap insurance. You can also check your auto insurance policy documents or contact your agency to see if you have a gap insurance rider as part of your coverage.

Sources

  1. Consumer Financial Protection Bureau. "What is Guaranteed Asset Protection (GAP) insurance?."
  2. Consumer Financial Protection Bureau. "Enhancing public data on auto lending."
  3. Kelley Blue Book. "How To Beat Car Depreciation."
  4. Insurance Information Institute. "What is gap insurance?."
  5. Insurance Information Institute. "Auto insurance basics—understanding your coverage."
Melanie Lockert
Melanie Lockert

Melanie Lockert is the founder of the blog and author of the book, "Dear Debt." Through her blog, she chronicled her journey out of $81,000 in student loan debt. Her work has appeared on Allure, Business Insider, Credit Karma, Fortune, and more. She is also the co-founder of the Lola Retreat and host of the Mental Health and Wealth show podcast. She lives in Los Angeles and enjoys jazz music, traveling, coffee, and spending time with her two cats and partner.

Sarah Archambault
Sarah Archambault
  • Experienced personal finance writer

  • Background working with banks and insurance companies

Sarah enjoys helping people find smarter ways to spend their money. She covers auto financing, banking, credit cards, credit health, insurance, and personal loans.

Featured in

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Konstantin Halachev
Data reviewed byKonstantin HalachevVP of Engineering & Data Science
Headshot of Konstantin Halachev, VP of Engineering at Insurify
Konstantin HalachevVP of Engineering & Data Science
  • 7+ years experience in data analysis

  • Ph.D. in Computational Biology

Konstantin has led data teams across multiple industries, including insurance, travel, and biology. He’s led Insurify’s engineering team for more than three years.

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