Gap insurance—short for Guaranteed Asset Protection—is an often-overlooked type of coverage that can save you thousands of dollars if your car is totaled or stolen. Here's the scenario: You owe $25,000 on your car loan, but due to depreciation, your car is only worth $20,000. If your car is totaled, your regular insurance pays the actual cash value ($20,000), leaving you with a $5,000 gap to pay out of pocket. Gap insurance covers that difference.
When Gap Insurance Makes Sense
Gap insurance is most valuable when there's a significant difference between what you owe and what your car is worth. This typically happens with new cars (which depreciate 20-30% in the first year), leased vehicles (where you're responsible for the full value), long loan terms (60-84 months), or if you rolled negative equity from a previous car into your new loan.
When to Skip Gap Insurance
You probably don't need gap insurance if you made a 20% or larger down payment, have a shorter loan term (36-48 months), your car holds its value well, or you've already paid down your loan to where it's less than the car's value. Check your loan balance against your car's current trade-in value to see where you stand.
Where to Buy Gap Insurance
You can purchase gap insurance from your auto insurance company, the car dealership, or your lender. Getting it through your auto insurer is usually the cheapest option at around $20-40 per year, compared to $500-700 upfront through a dealership. The coverage is essentially the same, so shop around before signing anything at the dealership.
