The short answer
Gap insurance pays the difference between what your car is worth and what you still owe on it if the car is totaled or stolen. Regular car insurance stops at the car’s current market value, so without gap coverage you could owe your lender money on a car you no longer have. That payout comes from your collision or comprehensive coverage; see full coverage vs. liability.
Why the gap happens
New cars lose value fast. Triple-I notes that most lose about 20% of their value within the first year. If you made a small down payment or took a long loan, your balance can stay higher than the car’s value for the first few years.
An example: you owe $28,000 and the car is worth $23,000 when it’s totaled. Your collision or comprehensive coverage pays about $23,000, minus your deductible. Gap insurance covers the $5,000 still owed on the loan.
Who should consider it
Triple-I suggests gap coverage if you:
- put down less than 20% on the car,
- financed for 60 months or longer,
- rolled money you still owed on your old car into the new loan, or
- bought a model that loses value faster than average.
Leasing? Gap coverage is generally required on a lease, and it’s often built into the lease already. Check your contract before buying it twice.
To see whether you’re likely “upside down” right now, compare your loan balance with your car’s value, or run the numbers in our coverage calculator.
Where to buy it
- Your car insurance company. Triple-I says insurers usually charge less than dealers. It’s added to a policy that already has collision and comprehensive, and Triple-I puts the cost at roughly $20 a year.
- The dealer or lender. Dealers often offer it with other add-ons when you buy. The CFPB warns that prices vary a lot, and if you finance it, it’s added to your loan and you pay interest on it.
Compare prices before you sign. If you already bought it from the dealer, you can still shop it with your insurer. Buying a car is also a good time to compare car insurance quotes, since your price will change with the new car anyway, and to check which discounts you qualify for.
Is it required?
Usually not for a loan. The CFPB says that if a lender tells you gap coverage is required to get financing, check your sales contract or ask the lender. If it really is required, its cost has to be included in the finance charge and the APR you’re shown. If it’s optional, you can say no.
When to drop it
Gap coverage stops being useful once you owe less than the car is worth. The CFPB says you can cancel optional add-ons like this at any time, and you may be owed a refund if you sell the car, refinance or pay the loan off early. If you can’t find your paperwork, contact the lender, the gap provider or the dealer that sold it.
If you’re putting the car in someone else’s name, or buying it for a family member, see insuring a car that’s not in your name.
Frequently asked questions
What does gap insurance cover?
The difference between your car’s actual cash value and what you still owe on your loan or lease if the car is totaled or stolen.
Is gap insurance cheaper from my insurer or the dealer?
Triple-I says car insurers usually charge less than dealers, often about $20 a year added to a policy with collision and comprehensive. Dealer gap is often rolled into your loan, so you also pay interest on it.
Can I cancel gap insurance?
Yes. The CFPB says you can cancel optional add-ons at any time, and you may get a refund if you sell, refinance or pay off the loan early.
Do I need gap insurance on a lease?
It’s generally required on a lease, and many leases already include it. Read your lease before buying a separate policy.
Sources
- Insurance Information Institute (Triple-I): What is gap insurance?
- Consumer Financial Protection Bureau: What is Guaranteed Asset Protection (GAP) insurance?
This guide is general information, not insurance or legal advice. Coverage and requirements vary by insurer and state.
