Get expert insights delivered straight to your inbox.

Skip to Main Content

What Is GAP Insurance?

Once you know what GAP insurance for cars is, it seems logical that’s what it’s called. It fills the gap between your car loan balance and your car’s resale value if it gets totaled or stolen. The name fits, right?

Well, kinda. It’s actually an acronym for guaranteed asset protection, but it’s also used to indicate there’s a financial hole that needs to be filled.

What? Really?

Really. Keep reading to learn more . . .

What Is GAP Insurance?

GAP insurance for cars covers the difference between the value of your car if it’s totaled or stolen and the amount that you still owe on the car if it’s financed or leased. In other words, if your vehicle is totaled or stolen before your loan or lease is paid off, GAP insurance covers the difference between what your car is worth on a used-car lot and the amount you still owe.

Full disclosure here before we continue: We hate debt. We do not recommend car loans. We’ll always tell you to buy your car with cash because, truthfully, financing a car means your car isn’t even yours!

But if your sanity temporarily goes AWOL and you take out a car loan (gasp!), GAP insurance can be a smart way to protect your money.


How Does GAP Insurance Work?

The first thing to know about GAP insurance is that it works together with collision and comprehensive insurance. You must have collision and comprehensive insurance on your policy in addition to GAP insurance. This is because GAP insurance supplements the payout from collision and comprehensive.

Consider also that GAP insurance is only necessary if you have a loan or lease balance on your car. In fact, car dealerships and auto finance companies usually require GAP insurance before you can qualify for a loan or lease.

Those are the nuts and bolts of how GAP insurance works. If you want to dig a little deeper, we researched everything for you and put together an in-depth article here.

Why Do I Need GAP Insurance?

GAP insurance can offer an enormous amount of financial protection (and precious peace of mind) for car purchases and leases, but only in certain situations. Let’s talk about when it’s useful and when you don’t really need it.

In all cases, the key factor for deciding if GAP insurance is worth it, is whether you’re upside-down on your loan. An upside-down car loan means that the amount you owe is greater than the value of your car.

So, for low down payments (less than 20%) and long-term loans (60 months or more), your car ownership will most likely be upside-down for the first few years of the loan until you can shrink your debt and expand your ownership. For those first few years, GAP insurance can be helpful.

On the flip side, the most common reason for skipping GAP insurance is if the difference between your car loan balance and your car’s actual cash value (ACV) isn’t big enough to justify buying GAP insurance.

GAP Insurance Is Necessary

GAP Insurance Isn’t Necessary

Low down payment: If your down payment is 20% or less, you need GAP insurance until you decrease your loan balance.

High down payment: If your down payment is 20% or more, your loan balance might not be high enough to justify GAP insurance.

Long loan length: If the length of your loan is 60 months or longer, you need GAP insurance until you decrease your loan balance.

Short loan length: If the length of your loan is less than 60 months, you don’t need GAP insurance because your loan balance might not be more than your car’s worth.

Car lease: Most car dealers require that you buy GAP insurance (in addition to collision and comprehensive coverage) before you lease a car.

Low-priced car: If you finance a low-priced car, the difference between your loan balance and your car’s worth most likely won’t justify GAP insurance.

What Does GAP Insurance Cover?

The most common GAP-insurance question we hear is, Does it cover cars that are stolen? The answer is yes, but only if you have comprehensive insurance. (There’s always a catch, right?)


Don't let car insurance costs get you down! Download our checklist for easy ways to save.

If you have comprehensive coverage on a financed car (most lenders require it), your provider will pay out the ACV of the car that was stolen, and your GAP insurance will cover the difference between the comprehensive coverage payout and your loan balance.

We’ve hit on the basics here. Learning more about what GAP insurance does and doesn’t cover is a smart way to protect yourself from an unexpected financial disaster.

How Much Does GAP Insurance Cost?

Now for the good news. GAP insurance is relatively cheap.

Typically, insurance providers offer GAP insurance at a much better price than car dealers. A reputable car insurer will generally charge 5% to 6% of the price of your annual collision and comprehensive premium.1 So, if you pay $1,000 a year for those two coverages, you’d pay $50–60 extra per year for GAP insurance.

Some insurance providers charge as little as $20 a year for GAP insurance with collision and comprehensive.2 That said, your cost will vary according to your state, age, driving record and the model of the car.

It’s best to shop around. But instead of doing the legwork yourself, we recommend connecting with one of our Endorsed Local Providers (ELPs) who can find GAP insurance at the best price for you.

Save Money With an Insurance Bundle

A RamseyTrusted pro can hunt down the best car and home insurance deals to get you quality coverage without breaking the bank.

Connect with a Pro Today

Is GAP Insurance Worth It?

The best way to decide if GAP insurance is worth the monthly payment is to think about these three things: how much you owe on your car loan, how much your car is worth, and how much cash you have.

If your car loan balance is higher than your car’s value, you’re upside-down on your loan, and GAP insurance is worth it. Kelley Blue Book is a good resource for finding the value of your car.

For example, let’s say you owe $17,000 on your loan balance, and your car is worth $12,000. You’re upside-down on your loan here because your loan balance is higher than the value of your car. GAP insurance is worth it in this case because if your car is totaled or stolen, you’d be on the hook for $5,000 ($17,000 minus $12,000) to pay off your loan balance.

Also think about whether you have enough cash to afford the out-of-pocket expenses. If you have enough cash to cover the difference between your loan balance and your ACV payout, GAP insurance won’t be worth it for you.

GAP Insurance FAQs

Still got questions about GAP insurance? We get that! (It’s kind of a complex topic.) We collected answers to the most common questions about GAP insurance.

1. Can you get GAP insurance after you buy a car?

Yes, you can. Insurance agents can add GAP insurance to your policy after your car purchase or lease.

2. Do you need GAP insurance if you already have full coverage?

Assuming you took out a loan to buy your car (ugh!), you need GAP insurance. Even if you have collision and comprehensive coverage (sometimes called full coverage), those coverages won’t help if there’s a cost difference between what you owe from an accident and what you owe on your loan.

Especially during the first few years of your auto loan, while your car value is depreciating faster than your loan balance is shrinking, GAP insurance is very helpful.

3. How do I get a GAP insurance refund?

You won’t get a full refund on your GAP insurance policy, but you can get a portion back. 

4. How long should I keep my GAP insurance?

The best time to cancel your GAP insurance is when your loan amount drops below your car’s value. Keep in mind, though, that when GAP insurance is required by a lease or loan, there’s usually a condition for cancellation. Read your contract to find out when you’re legally allowed to cancel your GAP insurance.

Also, if you’re cancelling your GAP insurance because you’re selling or trading your car, make sure you wait until after the transaction is complete.

5. How do I get GAP insurance?

GAP insurance is easier and cheaper to get through a car insurance agent compared to a dealership.

Find the Best GAP Insurance at the Cheapest Price

Wondering where you can get car GAP insurance for a good price? Typically, insurance agents offer it at a significantly lower price than car dealers.

We recommend getting in touch with one of our Endorsed Local Providers (ELPs). Our ELPs are independent agents so they’re not tied to a single agency and can find the best coverage for you at the best price. It also means they can give you an honest answer about whether or not you need GAP insurance. If you do, they can take the time needed to explain your options.

Connect with an ELP today!

Did you find this article helpful? Share it!

Ramsey Solutions

About the author


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. Learn More.

Related Articles

Is It Better to Buy a Car New or Used?

Is It Better to Buy a New or Used Car?

Shopping for some new wheels? We’re breaking down the cost of new vs. used cars—and how to make the right choice for your budget.

Ramsey Ramsey