Gap Insurance: How It Works and What It Covers

Gap insurance provides essential coverage for financed vehicles in the event of a total loss.

Christy Rakoczy
Written byChristy Rakoczy
Christy Rakoczy
Christy Rakoczy

Christy Rakoczy has been a personal finance and insurance writer for over a decade. Her work has been published on USA Today, MSN, Yahoo Finance, Credit Karma, Forbes Advisor, and more. Christy has a JD from UCLA School of Law and previously worked as a data analyst for Blue Cross and as a paralegal studies instructor before transitioning to writing full time.

Courtney Mikulski
Courtney MikulskiSenior Editor, Auto
  • 3+ years producing insurance and personal finance content

  • Main architect of the Insurify Quality Score

Courtney’s deep personal finance knowledge extends beyond insurance to credit cards, consumer lending, and banking. She thrives on creating actionable content.

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Konstantin Halachev
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Konstantin HalachevVice President of Engineering
  • 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 March 25, 2024

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Gap insurance — also called guaranteed asset protection — provides protection when the insurance settlement after a total loss doesn’t cover the remaining loan balance on a financed car.[1] This coverage can be crucial when your car sustains damages beyond repair and you’re still making payments on an auto loan.

With comprehensive or collision insurance, car insurance companies cover damages in the event of vehicle theft and a total loss. However, insurers only pay the actual cash value of your car, minus any deductible.

In many cases, a financed or leased vehicle’s actual cash value is less than the remaining amount due on the car loan. In this case, the car owner has negative equity or is “underwater” on the loan.

Here’s what you need to know about gap insurance.

Quick Facts
  • Gap insurance only kicks in for covered insurance claims.

  • Drivers only need gap insurance when they finance or lease their vehicles.

  • Gap insurance policies may have limits on how much insurance companies pay out, so read your policy carefully to understand what it covers.

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How gap insurance works

Gap insurance covers the difference between your collision or comprehensive insurance payout and the balance on your auto loan after vehicle theft, damage, or total loss. Without this protection, you could be liable to pay for the loan on a car that you can’t use anymore.

The information in the table demonstrates how gap coverage can help protect you from financial loss.

 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

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:

  • Auto loan company: Buying gap insurance from an auto loan company can cost $500 to $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.[2]

  • Your current auto insurer: If you purchase gap insurance from your current insurer when you first buy a policy for your car, it’s typically $20 a year for coverage.[3] Many of the best car insurance companies offer gap coverage as an option for auto insurance policies.

  • 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 to $300.[2]

What gap insurance covers

Gap insurance is usually an add-on to comprehensive coverage or collision coverage and part of a full-coverage policy. It only kicks in to pay for the remaining balance of your loan when your insurance company totals your car as part of a covered claim.

Here are situations in which gap insurance won’t cover you: 

  • Normal wear and tear

  • Mechanical breakdowns

  • Claims the insurer doesn’t cover

For example, let’s say you owe $20,000 on a car with an actual cash value (ACV) of $15,000 and have a collision deductible of $1,000. If you crash your car into a tree and the cost of fixing it is more than the car’s value, your insurance company will likely total it. The insurer would pay you $14,000 for a total loss settlement, which is the car’s ACV minus your deductible.

Then, you would still owe $6,000 on the car’s loan. With gap insurance, your insurer would pay the remaining $6,000 balance due on the loan.[1]

But let’s say your car has a massive engine failure and the cost to fix it is worth more than its value. Because insurance doesn’t cover mechanical breakdowns, your insurer will likely deny any claim you submit from this event. Since gap insurance only pays out for covered claims, it won’t apply here.

Gap insurance vs. full coverage

Full-coverage auto insurance typically includes state-minimum liability insurance, comprehensive insurance, and collision insurance.

Full-coverage policies can also include optional coverages that insurers offer, like roadside assistance, rental car reimbursement, and gap insurance.

Adding more protections to a full-coverage policy may increase the cost of your insurance, but it gives you more coverage in various situations. Auto lenders may require full-coverage insurance for a financed or leased car, but they typically don’t require gap insurance — gap coverage is usually completely optional.

Who needs gap insurance?

Anyone at risk of negative equity on their vehicle should consider purchasing gap insurance. However, some drivers are more vulnerable than others. It would be especially important to purchase gap insurance in the following circumstances:[3]

  • You finance a new car with a down payment of less than 20%.

  • The terms on your auto loan are longer than 60 months.

  • You purchase a vehicle that depreciates faster than others.

  • You roll negative equity from a previous car loan into a new car loan.

  • You lease a vehicle.

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When to drop gap insurance

It only makes sense to have gap insurance if you have a loan on your vehicle. As soon as your car loan balance is less than the vehicle’s actual cash value, you no longer need gap insurance. At this point, it’s likely the insurance settlement after a total loss will completely cover your car loan’s remaining amount.

Where to buy gap insurance

Here’s where you can buy gap insurance for extra protection on your financed vehicle.

Dealerships

When you purchase a car at a dealership, the salesperson may offer you gap insurance as an add-on to your total purchase amount. You can accept or refuse the gap insurance, as it’s usually optional.[1]

Just keep in mind that purchasing gap insurance from the dealership when you finance a vehicle means the cost is rolled into the total purchase amount and will accrue interest with the rest of the loan balance. It likely costs less to purchase it from an auto insurance company.

Auto loan companies

If you secure a loan for a new car with an auto lender before heading to the dealership, the lender may offer you a form of gap insurance to include in the loan. For example, State Farm includes Payoff Protector in all its auto loans. Again, this is included in the total loan amount, which means it accrues interest over the life of the loan.

Auto insurance companies

Like with many coverages, you can purchase gap insurance directly from an insurance company. When you call your auto insurance company to get coverage for a new car at the dealership, you can ask to include comprehensive, collision, and gap coverages in your policy. Because it’s part of your auto policy, you will be able to drop gap coverage and stop paying for it when you no longer need it.

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Gap insurance FAQs

If you’re in the market for a car, you can learn more about car insurance rates by make and model. Here are the answers to common questions about gap insurance.

  • 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 only pay out 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 a blown engine. 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. It doesn’t cover mechanical breakdowns or normal wear and tear damage.

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

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

Sources

  1. Consumer Finance Protection Bureau. "What is Guaranteed Auto Protection (GAP) insurance?." Accessed October 17, 2023
  2. Mercedes-Benz. "How Much is Gap Insurance?." Accessed October 17, 2023
  3. III. "What is gap insurance?." Accessed October 17, 2023
Christy Rakoczy
Christy Rakoczy

Christy Rakoczy has been a personal finance and insurance writer for over a decade. Her work has been published on USA Today, MSN, Yahoo Finance, Credit Karma, Forbes Advisor, and more. Christy has a JD from UCLA School of Law and previously worked as a data analyst for Blue Cross and as a paralegal studies instructor before transitioning to writing full time.

Courtney Mikulski
Edited byCourtney MikulskiSenior Editor, Auto
Courtney Mikulski
Courtney MikulskiSenior Editor, Auto
  • 3+ years producing insurance and personal finance content

  • Main architect of the Insurify Quality Score

Courtney’s deep personal finance knowledge extends beyond insurance to credit cards, consumer lending, and banking. She thrives on creating actionable content.

Featured in

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Konstantin Halachev
Data reviewed byKonstantin HalachevVice President of Engineering
Headshot of Konstantin Halachev, VP of Engineering at Insurify
Konstantin HalachevVice President of Engineering
  • 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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