What Is GAP Insurance for Cars?

Once you know what GAP insurance for cars is, its name seems logical. 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, kind of. 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.

Keep reading to learn more.

• What Is GAP Insurance?
• How Does GAP Insurance Work?
• When Do I Need GAP Insurance?
• What Does GAP Insurance Cover?
• How Much Does GAP Insurance Cost?
• Is GAP Insurance Worth It?
• GAP Insurance FAQs

The best way to explain how GAP insurance works is to give you some sample situations where it can come in handy.

• If you lease your car. (Don’t lease a car!)

• If you finance your car with less than a 20% down payment. (Don’t finance a car whether you have a down payment or not.)

• 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 no matter the size or make, most cars lose 60% of their value within the first five years.³

Say you were to finance a car for $22,000 and, heaven forbid, get into an accident and total your new ride. Your car insurance would kick in to pay you the Kelley Blue Book value based on the age, mileage and condition of your car before it got wrecked. This is where a lot of car owners are in for a shock. Since the value of a new car depreciates so quickly (starting with an instant 10% drop the minute you drive it off the lot), the insurance company will only pay a fraction of the car’s original price.⁴ In this case, let’s say they pay you $15,000. But you still owe close to $22,000—because you made the decision to finance a car. You now have a huge $7,000 gap between your payout and your loan balance. Ouch!

If you’re left owing money on a freshly totaled heap, your GAP insurance helps. It supplements the payout from your collision insurance (or in the case of theft, comprehensive insurance) to finish paying off the loan on the car that went kaput.

Here’s a visual:

This is worth repeating: GAP insurance is only necessary if you have a loan or lease balance on your car. (Yeah, we’re once again telling you to pay cash for cars.) In fact, car dealerships and auto finance companies sometimes include GAP insurance in your financing automatically—or at least strongly recommend it—especially if you’re buying a new car with little or no down payment.

GAP insurance can offer financial protection (and precious peace of mind) for car loans 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 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), you’ll 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 paying for the coverage.

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?)

In the case of theft, if you have comprehensive coverage on a financed car (and again, most lenders require it), your insurance 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.

Same deal if your car is totaled—your GAP insurance will cover the rest of your loan after the collision policy payout.

We’ve just 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.

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

Typically, you’ll get a much better deal buying it through your insurance company than from the dealership. Car dealers may push hard to sell you GAP coverage—and even offer to roll it into your loan. Don’t fall for it! You'll be charged interest on your GAP insurance too if you let the dealer add it to your vehicle loan.

A reputable car insurer will generally only charge a small fraction of the price of your annual collision and comprehensive premium to add GAP. For example, if you pay $1,000 a year for those two coverages and the insurer charges you 5-6%, you’d pay $50–60 extra per year for GAP insurance.

Most insurance providers charge as little as $20 a year for GAP insurance with collision and comprehensive.⁵ That said, your cost will vary according to your state, age, driving record and model of car.

It’s best to shop around. But instead of doing the legwork yourself, we recommend connecting with one of our RamseyTrusted® insurance advisors who can find GAP insurance at the best price for you.

The best way to decide if GAP insurance is worth the monthly payment is to think about these three things:

1. How much you owe on your car loan
2. How much your car is worth
3. How much cash you have

If your car’s loan balance is higher than its 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.

Also, think about whether you have enough cash to afford the possible out-of-pocket expense. If you can cash flow the difference between your loan balance and your ACV payout, GAP insurance won’t be worth it for you. (Then again, why not use your cash to pay that thing off today and experience the joy of owning a car without payments?)

Does GAP insurance still have you puzzled? We get that! (It’s kind of a complex topic.) So here are answers to the most common questions about GAP insurance:

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

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

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

You only need GAP insurance if you took out a loan or lease on your car (ugh!) and even then, only in certain situations. Even if you have collision and comprehensive coverage (sometimes called full coverage), those coverages only pay up to your car’s current market value—not what you still owe on the loan.

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

3. Can I get a GAP insurance refund?

If you pay off your car loan early, sell or trade your car, or switch insurance companies, you won’t get a full refund on your GAP insurance policy, but you can get a portion back. Just keep in mind, you can’t get a refund simply because you never used the coverage or filed a claim.

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. But 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 canceling 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 advisor compared to a dealership.

Find GAP Insurance With an Advisor You Can Trust

Insurance is a critical piece of your financial plan—and your life. But it’s not always easy to know what to get. If you’re wondering where you can get GAP insurance for a good price, here’s the deal: Insurance advisors usually offer it at a significantly lower price than car dealers.

We recommend getting in touch with one of our RamseyTrusted advisors. Because they’re independent (not tied to a single agency), they can shop around to find you the best coverage at the best price. It also means they’ll give you an honest answer about whether you need GAP insurance. If you do, they’ll take the time to explain your options.

Connect with a RamseyTrusted pro today!