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How Does Gap Insurance Work?

You walk onto the lot looking for a sensible car for your commute—a used one if you can get it. But on the way to look at that economy hatchback that gets 40 miles per gallon, the dealer notices your eye wander toward that big, beautiful luxury sedan—the German one. He says, “I know you had your heart set on the hatchback, but we’re running a special this month. I can get you in that bad boy today for zero down at 2.9% APR. You know you want to test-drive. Come on, let’s do it.” The next thing you know, you have a $65,000 car with a $700 a month car payment.

The only problem is that as soon as you get the keys and drive the car off the lot, it’s now worth just $40,000. If you get into an accident and total the car, you’ll be on the hook for that extra $25,000. That’s where a little thing called gap insurance comes in.  

So, how does gap insurance work?

We’ll tell you what it is and why—if you follow our advice—you never should need it.

Let’s dive in!

What Is Gap Insurance and How Does It Work?

Guaranteed Auto Protection, also known by its pun of an acronym—gap—is insurance that covers the difference between the vehicle’s actual cash value versus what you still owe on the loan.


Let an independent auto insurance agent find you the best deal. We get you quotes from all the providers. Get the right coverage at the right price!

Here are some situations in which gap insurance can come in handy:

  • If the term of your loan is longer than 60 months. That’s five years—yikes!
  • If you finance a car that depreciates faster than the average car. Think big, luxury sedans. But most cars lose 60% of their value within the first five years.1

Now, full disclosure: If you haven’t figured it out from the above, we’re always going to tell you to buy your car with cash. We hate debt and would never recommend you get yourself into any of these scenarios.  

But if you were to finance a car and, heaven forbid, get into an accident and total your new $22,000 ride, your insurance company will pay you the Kelly Blue Book value of your car. Let’s say your insurer pays you $15,000. But you still owe close to $22,000 because you made the dumb decision to finance a car.

So, the gap is $22,000 minus $15,000, which is $7,000. If you have gap insurance, your insurance covers the “gap” so you can pay off the loan. Here’s a visual:


Starting Loan Balance Actual Cash Value Difference (the Gap)
$22,000 $15,000 $7,000


(Note: You can also expect to pay your deductible. Sometimes gap insurance reimburses you for your deductible and sometimes it doesn’t. You’ll have to check your policy.)

What Does Gap Insurance Cover?

Remember, gap insurance covers the gap between what your car is worth and how much you owe on it if it gets totaled or stolen.

It doesn’t matter how your car gets destroyed. If your insurance company deems the car a total loss, your gap insurance will kick in after your basic collision or comprehensive insurance kicks in (to cover up to the current value of the car).

For example, gap insurance would come into play if your car was impacted by:

  • Collision
  • Vandalism 
  • Theft
  • Flood
  • Tornado
  • Hurricane
  • Terrorism

If your insurance company deems the car a total loss, your gap insurance will kick in after your basic collision or comprehensive insurance kicks in.

What Gap Insurance Doesn’t Cover

What does gap insurance not cover? Well, quite frankly, a lot! And that causes a lot of confusion. Here are some of the things gap insurance won’t cover:

  • Car payments if you lose your job or go on disability
  • Vehicle repairs
  • Car rental while your car is in the shop
  • Extended warranties

Gap insurance doesn’t cover any of these things. In fact, gap insurance literally just covers the difference between what your car is worth and what you owe on the loan and nothing else.

How Much Does Gap Insurance Cost?

Let’s talk dollars and cents. There are two places you can buy gap insurance: from the finance company at the dealer and your regular car insurance provider.

If you buy at the point of sale—either from the dealership or the bank financing your loan—it’s usually outrageously expensive and you pay everything up front. We’re talking $500–700!2

That cost actually gets added to your loan amount, which means you’ll also be charged interest on what you paid for gap insurance! So, don’t buy gap insurance from the dealership or bank.

If you already have a car loan you can’t get out of, check your coverage with an independent insurance agent to see whether or not gap insurance is included and if you still need it.

Most car insurance policies tack on about $20 to your yearly premium to include gap insurance.3 An agent can also check the rest of your policy to make sure you’ve got the right coverage you need at the best price. 

Want to know if you have the right car insurance? Download our free Car Guide today! And if you’re looking for other ways to save on car insurance, check out these tips.

Is Gap Insurance Worth the Money?

Here’s the thing—gap insurance essentially protects the debt you still owe on your car. Cue the eye roll.

So, is gap insurance worth it? If you owe a lot more on your car than it’s worth, it’s probably okay to keep the gap insurance until you’re no longer upside down. If you do have gap insurance, it means you’ll be reimbursed the difference between your car’s value and what you still owe. And if you don’t have it, then you’re responsible for footing the bill for the difference.

Remember, debt is dumb and we don’t want you drowning in car payments. It’s better to pay cash for your car and let your basic comprehensive insurance protect you if you ever have to replace your car.

Get an Insurance Checkup Today

Gap insurance aside, if you’re curious about your coverage in general or just want to shop around for a better rate, our independent insurance Endorsed Local Providers (ELPs) can sit with you and go through all of your car insurance needs for multiple vehicles. In fact, most people who use an insurance ELP save around $700! Think of what you could do with all that extra money in your pocket!

Find your independent auto insurance agent today!


Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.

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