We are searching for

Please wait. This should take only a few seconds.

What Is Gap Insurance and How Does It Work?

If you've ever leased or financed your car, you may have heard of Gap coverage insurance - but what is Gap coverage, and how can it benefit you? Today, we will explore the concept of Gap insurance and explain how it may help protect you in the event of a total loss or theft. So, buckle up, and let's get ready to learn all about Gap car insurance and how it could be helpful when purchasing your next car.

What is Gap Insurance for Cars?

The Gap insurance definition is insurance that covers the difference between what you owe on your car loan and what your car is worth in the event of a total loss. If you have an accident and your car is totaled, the insurance company will pay you the actual cash value of the vehicle. However, you may still owe money to the lender if you have a loan or lease on the vehicle. Gap insurance pays the "Gap" between the ACV of the vehicle and the amount you still owe on your loan or lease.

Most auto loans and leases require Gap insurance. If you don't have Gap insurance and you total your car, you will be responsible for paying off the remainder of your loan or lease. The lender may repossess your car if you can't afford to do so.

Gap insurance is relatively inexpensive and typically costs about $20-$30 per year. It's important to note that Gap insurance only covers accidents considered "total losses". In other words, it will not pay for damages to your car that you can repair.

How Does Gap Insurance Work?

If you have a loan or lease on your car, chances are your lender requires you to have Gap insurance. Having Gap insurance helps pay the cash difference between what you owe on your vehicle and its cash value if it's totaled in any type of accident. So, if you owe $20,000 on your car, but the actual cash value is only $15,000, your Gap insurance would pay $5,000.

Gap insurance typically kicks in after your primary auto insurance pays its maximum coverage amount. It can cover the remaining balance of your loan or lease if it exceeds the actual value of your vehicle. It's important to remember that most policies limit how much they will cover. Additionally, many policies exclude certain types of damage, such as wear and tear or parts that are not original to the make and model.

It's also important to note that car Gap insurance usually only applies to cars that are less than five years old. If you're financing an older car, other types of coverage may help protect you from losses due to total loss.

Gap insurance can be a good option for drivers considering financing a new car or leasing a vehicle. If you are considering Gap insurance, be sure to speak with your insurer about exactly what is covered by the policy and whether there are any additional requirements or limitations you need to know about.

Is Gap Insurance Worth It?

Gap insurance is an optional, add-on car insurance policy that can help certain drivers cover the unpaid "Gap" between what they owe on their car at the time of the accident and the actual cash value of the car if the car becomes a total loss. In other words, if you have Gap insurance and you total your car, your Gap insurance policy will pay out enough money to cover the difference between what you still owe on the vehicle (the loan amount or lease amount) and what it is worth at the time of the accident (as determined by your auto insurance company).

While not required by law like liability insurance, some lenders may require borrowers to purchase Gap insurance when they finance or lease a new vehicle. Similarly, some leasing companies automatically include Gap coverage as part of their lease agreements.

If you don't purchase Gap insurance at the same time you buy your auto policy – or if your lender or leasing company doesn't require it – you can still buy a standalone Gap insurance policy later. However, it's important to note that most auto insurers will only sell you a standalone Gap policy if your vehicle is less than one year old and has fewer than 20,000 miles on it.

Types of Gap Insurance

Consumers can choose from two common types of Gap insurance policies: lease or loan payoff, or they can cover a total loss.

Loan/lease payoff is the more common type of Gap insurance. It pays off the difference between what you owe on your loan or lease and what your car is worth if it's stolen or gets totaled. This coverage is typically required if you finance your car through a lender.

Total loss coverage pays off the difference between what you paid for your car and what it's worth if it's stolen or gets totaled. Lenders typically do not require this type of coverage, but it may be offered as an option for an additional premium.

Do I Need Gap Insurance?

Gap insurance is optional insurance coverage that helps pay the difference between what you owe on your car and its actual cash value if it's stolen or gets totaled.

If you have a loan or lease on your car, Gap insurance is generally required. But even if it's not required, adding this coverage to your policy may be a good idea.

Here are some things to consider when deciding if Gap insurance is right for you:

  • Do you have a loan or lease on your car? If so, Gap insurance is likely required.
  • How much do you owe on your car? If you owe more than its actual cash value, Gap insurance could help pay off the remaining balance of your loan if your car is stolen or gets totaled.
  • What is the actual cash value of your car? This can be determined by your insurer or through online research. Keep in mind that cars depreciate in value over time, so your car may be worth less than what you paid for it.
  • Do you have other coverage? Some auto insurers offer features like rental car reimbursement and roadside assistance that can help offset the costs of a stolen or totaled car. Check with your insurer to see what coverages are available and how they might work together with Gap insurance.

What Does Gap Insurance Cover?

If your vehicle is stolen or gets totaled, Gap insurance will pay the difference between what you owe on your car loan and the actual cash value of your vehicle. This coverage is typically only offered on new and leased vehicles, and it's usually required by lenders if you don't have a large down payment.

Gap insurance is important to consider if you:

  • Make a small down payment on your vehicle
  • Lease your vehicle
  • Have an auto loan with negative equity

Without Gap insurance, you may be responsible for paying the entire balance of your loan if your vehicle is stolen or gets totaled. This could leave you stranded without a way to get to work or school. Gap insurance protects you from that financial burden and gives you peace of mind in case of an accident.

Questions to Ask Before Purchasing Gap Insurance

Before purchasing Gap insurance, it's important to ask your insurance agent or representative a few key questions:

  • What is the coverage amount? How much will the policy payout if you have a total loss?
  • How much is Gap insurance coverage? Can you afford it?
  • What is the deductible? How much will you have to pay out of pocket before the policy kicks in?
  • Does the policy cover theft or just damage caused by an accident?
  • Is there a time limit on the coverage? For example, some policies only cover damages incurred within the first year or two of ownership.
  • Is there a mileage limit? Do some policies only cover vehicles with low mileage?
  • What types of events are not covered by the policy? Knowing what coverage excludes is important so you're not blindsided if you need to make a claim.
  • When does Gap insurance not pay? Is that situation likely to happen?
  • When should I get Gap insurance? When is the best time to get it?
  • How do I know if I have Gap insurance? Is it included in my normal coverage?

At GoodCar, we believe that Gap insurance is an important part of the car buying experience. This is why we recommend carrying Gap insurance, especially when you consider that it will only cost you a few dollars a month. If you're in the market for a new or used car, don't forget to check out our vehicle history reports to get a good overview of any prospective vehicle you are looking at!

More resources