Mind the Gap: GAP Insurance

What is GAP Insurance?

New cars depreciate, or lose value, rapidly—as much as 20% in the first year. This can lead to a significant difference between what the car is worth and how much you owe on your loan or lease. If the car is stolen or totaled, you’ll get a check from your insurance for the car’s value. Guaranteed Asset Protection insurance, commonly called GAP insurance, makes up the difference if the value is less than what you owe.

Let’s look at an example. Say you own a car that’s worth $20,000 after depreciation, but you still owe $25,000 on your loan. If that car gets totaled, your insurance will give you a payout equal to the value of the car (minus your deductible). In this scenario, you’d get about $20,000, leaving you $5,000 short to pay off your loan. GAP insurance covers that remaining money for you, so you aren’t in debt for a car you can no longer use.

Bridging the GAP

GAP insurance is only available for those who buy a new (as opposed to used) car, RV, or trailer or those who are the first loan or leaseholder of the vehicle. It’s also only applicable if you don’t buy the vehicle outright. GAP insurance is designed to go with collision or comprehensive insurance, so you’ll likely need to purchase one or both of those coverages as well. Learn more about types of insurance by reading this article.

You can get GAP protection from multiple places including your bank or credit union, the dealership, or your car insurance provider. It’s important to note that most GAP insurance policies will not cover your deductible, so if your car does become a total loss, you’ll still pay a little. There also may be a cap on how much your GAP insurance pays (for example, 20% of the full value of the car).

Do I Need GAP Insurance?

GAP insurance really only comes into play if you’re likely to owe more than your car is worth. This could happen if you make a small down payment, lease a car, have a very long loan, or buy a vehicle that depreciates rapidly. Some lenders may require GAP insurance for certain loans.

The price of GAP insurance depends on where you get it. You may pay for GAP coverage as a lump sum added onto your loan (often a one-time payment of around $300-$800), or a monthly amount added to your insurance (usually around $20 a year).

The savings you get from GAP coverage can be significant, so when deciding if it’s right for you, it’s important to consider your risk tolerance. Are you okay with spending more for a coverage you may never use? Or are you willing to take the risk of not having coverage if you end up in an accident?