What is Gap Insurance for Cars and Do You Need It?

Key Takeaway:

Gap insurance for cars pays the difference between your vehicle's value and your remaining loan balance if your car is totaled.

Have you ever bought a new car and worried about its value dropping? The moment you drive off the lot, your car loses worth fast. This drop can leave you in a tough spot if you get into an accident. That is where gap insurance for cars protects your wallet.

How Gap Insurance for Cars Works

Imagine you buy a car for 30,000 dollars. You drive it for a year and still owe 25,000 dollars. If you get into an accident, your car could be completely destroyed.

Your main insurance company says your car is now only worth 20,000 dollars. They write you a check for that amount, but you still owe the bank 25,000 dollars. You must pay 5,000 dollars out of pocket for a car you cannot drive.

This is where gap insurance for cars saves you. It pays that remaining 5,000 dollars directly to your lender so you can move on easily.

Why Your Regular Car Insurance Is Not Enough

Many people think that full coverage car insurance covers everything. This is a common mistake that can cost you thousands. Regular collision policies only pay for the market value of your car at the crash time.

Cars lose value quickly, especially in the first two years. You can find smart money management tips on our home page to help you plan for this gap.

Who Really Needs to Buy This Coverage?

Not every driver needs this extra policy. If you made a down payment of 20 percent or more, you are safe. Your loan balance is already lower than the car's value.

However, consider it if you made a small down payment. It is also smart if your loan is 60 months or longer. You will be underwater on your loan for a long time.

Leasing a car is another situation where this is vital. Most leases require you to have it. Check our guide on how car loans work to see how payments affect your equity.

How Much Does This Protection Cost?

The price of this coverage depends on where you choose to buy it. If you buy it from your regular car insurance company, it is very cheap. It often costs just 20 to 40 dollars per year on your policy.

Buying it from a car dealership is a different story. Dealerships often charge a flat fee of 500 dollars or more. They also roll this fee into your loan, which adds interest costs.

Let's look at the average costs from different places in this simple table.

Where Should You Buy Your Policy?

I always tell my friends to call their regular insurance agent first. This is almost always the cheapest path. Most major insurance companies offer this coverage as a simple add-on.

If your insurer does not offer it, check with your bank. Many lenders sell these policies for a flat fee. This is still much cheaper than buying from the dealer.

How to Cancel Your Gap Policy

You do not need to keep this coverage forever. Once you owe less on your loan than the car is worth, you should cancel it. Keeping it past this point is just wasting your money.

To cancel, ask your lender for your current loan balance. Then, check your car's value online. If your loan is lower, call your agent to remove the coverage and save money.

Frequently Asked Questions