If your car is totaled in an accident and the insurance payout is less than what you owe on your auto loan, gap insurance can cover the difference. Unlike a standalone insurance policy, gap insurance acts as an add-on to your primary coverage, filling the financial gap between the payout from your insurance and the remaining loan balance. While liability car insurance is mandatory in all states except New Hampshire and Alaska, it only covers damages to others if you are at fault. Gap insurance helps you manage your own financial obligations when your car is declared a total loss.
A total loss happens when the cost to repair your car surpasses its fair market value. Car insurance comes in two main forms: collision coverage for accidents and comprehensive coverage for events like hail or vandalism. However, these coverages won’t help if your car is totaled and you still owe more on your auto loan than what your insurance pays. While your insurer covers the car’s fair market value, there could be a remaining balance between that amount and your loan debt. This is where gap insurance becomes a valuable optional coverage to bridge that gap.
Top 8 Questions People Ask About Gap Insurance
-
What Is the Purpose of Gap Insurance?
Gap insurance, which stands for Guaranteed Auto Protection, is designed to cover the difference between the amount you owe on your auto loan and the actual value of your car.
-
How Does Gap Insurance Work in Practice?
For example, if you purchase a vehicle with a $30,000 price tag and put down $3,000, you’ll owe $27,000 on your auto loan. With a 72-month loan at 9% interest, your monthly payment would be around $487. Gap insurance helps manage the difference if something happens to your car.
Let’s say your new car is totaled after just one year of driving, and you still owe about $24,600 on your auto loan. However, because cars lose value quickly, your car is now worth $24,000. In this case, your insurance will reimburse you $24,000, but you’re still left with a $600 difference to pay on your loan. Gap insurance would cover this $600 shortfall, preventing you from having to pay out of pocket.
In cases where your down payment was smaller or depreciation was more severe, the gap could be much larger, making gap insurance a crucial coverage to help with these costs.
-
What Does Gap Insurance Include?
Gap insurance helps pay the difference between the insurance payout for your car and the remaining balance on your car loan. The payout is usually based on the car’s actual cash value, which is the amount you’d get if you sold the car in its current condition, similar to the used car prices listed by Kelley Blue Book.
Typically, your insurance will not cover the replacement cost of the vehicle, which is the amount needed to purchase a new car of the same make and model. Instead, the payout is the car’s depreciated value, which is often less than your loan balance. Gap insurance bridges this gap and is available for almost all vehicles on the market.
-
What Gap Insurance Doesn’t Cover
Gap insurance is specifically designed to cover the difference between what you get for a totaled car and what you owe on your loan, often referred to as negative equity. It does not extend to other issues, such as accidents where the car is still drivable but needs repairs. Additionally, it does not cover mechanical failures or issues like tire problems, nor does it include roadside assistance services like tire changes or towing. For mechanical issues, you might look into extra warranties from your car dealer or lender. Gap insurance also does not cover theft; for that, you would need comprehensive car insurance, so be sure to confirm this with your insurance agent.
-
How Much Does It Cost to Get Gap Insurance?
Gap insurance is relatively affordable, typically costing between $400 and $700 per year when bought directly from the dealer along with your vehicle. If you opt for gap insurance as an add-on to your existing auto insurance policy, you can expect to pay about $20 to $40 per month.
The exact cost will vary based on factors like the type of vehicle you’re insuring, the size of your down payment, and where you live. Similar to how life insurance premiums depend on factors like age and health, the price for gap insurance will depend on various factors related to your vehicle and situation. To get the best deal, start by asking your current car insurance provider about the cost of adding a gap insurance rider to your policy, as they might offer discounts based on your existing coverage and customer history.
Often, insurance companies will automate your payments from your credit card, bank account, or credit union, making the already low monthly cost even easier to manage.
-
Do you need to have gap insurance?
Gap insurance is not typically mandatory, but it is often recommended for car buyers who make a down payment of less than 20%. This is similar to private mortgage insurance (PMI), which is required for homeowners with down payments under 20%, though PMI protects the lender while gap insurance protects the borrower. In certain cases, especially for vehicles that depreciate quickly like SUVs or luxury sedans, some auto lenders may require gap insurance. Most states require dealers to offer gap insurance, but their upfront packages can be more expensive than purchasing a gap insurance rider through your current insurer.
In summary, gap insurance is most beneficial when the cash value of your car is less than the amount you owe on your loan or lease. Over time, as you pay down the loan, these amounts will converge, and eventually, you will no longer need gap insurance. Once your loan balance is lower than the car’s value, gap insurance is no longer necessary.
-
Does gap insurance include coverage for your deductible?
Gap insurance does not cover your policy’s deductible, which is the amount you are responsible for paying out of pocket for car repairs before your insurance kicks in.
For example, if you have a $500 deductible and your car is totaled, you would need to cover the $500 yourself before you can receive any compensation. If the accident was caused by another driver, their insurance would handle the costs, and you wouldn’t need to pay the deductible.
-
Is gap insurance the same thing as total loss protection?
Gap insurance is different from total loss protection. While gap insurance covers the difference between your car’s payout value and what you owe on your auto loan, total loss protection offers a credit towards buying or leasing a new vehicle. With total loss protection, you might get a new car, but you still have to settle any remaining balance on your loan. Gap insurance specifically covers the financial shortfall between your car’s fair market value and your loan balance after a total loss, minus your deductible.
While gap insurance is necessary only when your vehicle’s value is lower than your remaining loan balance, total loss protection can be purchased for the entire time you own the vehicle. Total loss protection provides a credit towards a new vehicle if your car is totaled in an accident or stolen, whereas gap insurance only covers the difference between your car’s value and your loan balance in the event of a total loss.