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You've got full coverage car insurance to protect yourself and your vehicle. Should you buy gap insurance too? Gap insurance isn't required, but you might consider getting it if you owe more on your auto loan than your car is worth, you put down less than 20% when buying your car or you purchased a vehicle that depreciates quickly.
What Is Gap Insurance?
If your car is totaled due to an accident, theft or disaster, gap insurance (or guaranteed asset protection insurance) pays the difference between the vehicle's value and the outstanding balance of your loan or lease. Here's an example of how gap insurance coverage works.
- You bought a car last year and still owe $30,000 on your auto loan. Your car is totaled in a crash.
- The insurance company values the car at $27,000 and pays you $26,500 (the vehicle's value minus your $500 deductible).
- After putting the insurance payout toward your loan, you still owe the lender $3,500.
- Gap insurance pays the $3,500 so you don't have to.
Gap Insurance vs. Full Coverage Insurance
Both gap insurance and full coverage insurance come into play if the insurance company declares your vehicle a total loss, but they cover different things.
- Full coverage car insurance includes comprehensive and collision coverage, which pay to repair or replace your car if it's damaged in a covered event. If your car is declared a total loss, full coverage insurance pays to replace the vehicle based on its current cash value. Unfortunately, if the payout isn't enough to cover your outstanding loan or lease amount, you'll have to come up with the difference yourself.
- Gap insurance doesn't pay to replace your vehicle. Instead, it covers the difference between your full coverage insurance payout and your loan or lease balance. Because your insurance bridges this gap, you don't have to worry about how to pay your lender. (You're still responsible for paying your insurance deductible.)
Comprehensive insurance, collision insurance and gap insurance aren't legally required to drive. However, auto lenders and leasing companies typically require comprehensive and collision insurance for financed cars and leased vehicles. They may also require gap insurance.
When do you use gap insurance and when do you use full coverage insurance? Here are some examples.
- You get into an accident that tears off your bumper, causing $2,000 worth of damage to your car. You use your full coverage auto insurance to pay for repairs. Since the car isn't totaled, gap insurance doesn't apply.
- You have $10,000 remaining on your auto loan when you total your car. However, your full coverage insurance values the car at $11,000, so the payout is enough to pay off the loan. You don't need to use gap insurance.
- You bought a $40,000 car one year ago with a 10% down payment and financed the other $36,000. However, your car has depreciated by 20% since then and is now valued at $32,000. When an accident totals the car, your full coverage insurance pays out $32,000, leaving a $4,000 outstanding loan balance. Your gap insurance covers that amount.
Do You Need Gap Insurance?
Unless your lender or leasing company requires it, you don't need to buy gap insurance. However, there are a few situations where buying gap insurance may be worth it.
- Your down payment was less than 20% of the vehicle's purchase price.
- You have an auto loan or lease longer than 60 months.
- You rolled an upside-down auto loan into a new loan.
- You purchased a car that depreciates rapidly.
- You couldn't afford to pay the difference between your car's value and your loan or lease balance.
How Much Does Gap Insurance Cost?
Gap insurance from an auto insurance company is generally quite affordable, costing an average of $7 per month or $84 annually, according to data from Insure.com. However, depending on your insurance carrier and other factors, gap insurance prices can vary widely: Insure.com reports that gap insurance costs range from $2 to $20 per month.
Auto lenders, leasing companies and dealerships may offer gap waivers when you finance or lease a car. Technically, gap waivers aren't insurance. Instead, if your car is totaled, your financial responsibility for any remaining loan or lease amount above your vehicle's actual cash value is waived.
Gap waivers generally cost quite a bit more than gap insurance—sometimes $1,500 and up. This cost is often built into your loan or lease. If you have the option to purchase gap insurance from an insurance company instead, doing so could mean significant savings.
How to Buy Gap Insurance
Gap insurance isn't sold in every state and is usually only available if you have comprehensive and collision insurance. If you're looking to buy gap insurance, here's what to do.
- Check to see if you already have gap insurance. It's possible your loan or lease includes gap coverage; review your documents to find out.
- Get a quote from your current auto insurance company. You'll need comprehensive and collision coverage before you can buy gap insurance.
- Shop around and compare premiums. Not all insurance carriers offer gap insurance. Even if yours does, getting quotes from other providers might uncover a better rate. You can get quotes for standalone gap coverage or full coverage auto insurance online, by contacting insurance companies or using an insurance marketplace website.
Gap coverage is frequently included in your lease payment when you lease a car. As mentioned above, if you finance a vehicle through your auto dealer, you may have the option to fold a gap waiver into your loan payments. However, this is usually much more expensive than buying gap insurance from an insurance carrier.
Mind the Gap
In certain situations, it's possible for your outstanding auto loan to exceed your car's value—which could leave you owing thousands of dollars if your car is totaled. For a relatively low price, gap insurance can prevent having to drain your emergency fund to pay off your auto loan.
Whether you're shopping for gap insurance or just want to explore your car insurance options, Experian's auto insurance comparison tool can help. You'll get quotes from more than 30 top insurance companies all in one place. It's an easy way to streamline shopping for car insurance and help you find the coverage you need.