Skip to main content

If you drive a new car off the dealer's lot, having made your deposit and looking forward to your first payment, but wind up in an accident that makes the car unusable, what recourse do you have? Guaranteed Asset Protection insurance is the answer.

What Is Gap Insurance?

Guaranteed Asset Protection insurance protects the borrower -- you -- if your car is totaled by paying what remains between the balance of your payments owed on the financing and the actual cash value of the vehicle to be paid by your auto insurance.

Most often, GAP insurance is used on new and used small vehicles, like cars and trucks, and heavy trucks. In some cases, financing companies and lease contracts require the insurance be obtained.

GAP insurance, however, is additional insurance. It covers the difference between the amount owed on a loan and the amount covered by another insurance policy. Some GAP policies even cover the deductible of your regular auto insurance.

The insurance is particularly marketed for low down payment auto loans, high interest loans or loans with 60 month or longer terms.

The finance company with your auto loan usually offers GAP insurance at the time of purchase, as do most auto insurance companies. Because GAP insurance is usually paid upfront, a buyer is eligible for a refund if he or she sells or refinances the vehicle

How Does Gap Insurance Work?

Depending on how much you put down as a down payment on your car, you may be "upside down" on your car payment the minute you drive it off the lot. If your car gets totaled, after you've only started paying on it, you may get less money based on the cash value of your vehicle than you still owe on your auto loan.

If you buy your vehicle for, say, $27,000 with a $2,000 down payment, it may be only worth $18,000 to $19,000 in terms of cash value based on an insurance company's calculations, based on the car's condition, various price surveys, and industry guides if it gets totaled.

So, even if you get the maximum insurance payout from collision coverage from your auto insurance company, you might still wind up owing $7,000 or so on your auto loan, with no car. 

Or, if you owe, say, $20,000 on your auto loan, but your car is totaled and your auto insurance will only pay $15,000 for it, you still will owe $5,000 on your auto loan, even though you no longer have the car.

Your gap insurance, if you purchased it, will pay the "gap," or the difference, between your reimbursement, and the amount you still owe on the loan.

Average Cost of Gap Insurance

Gap insurance costs typically about 5% of the part of your annual auto insurance premium related to comprehensive and collision coverage. The rates can, of course, vary based on your car's assessed value, location, and your driver history.

If, say, your annual premium toward comprehensive and collision coverage in your insurance is $600, your gap insurance is likely to be about $30 a year.

According to, the average annual cost of gap insurance is $36-$80 through auto insurance companies. A gap insurance policy provided by an auto finance lender can be up to $700 per year, usually rolled into your monthly auto loan payments.

What Does Gap Insurance Cover?

Gap insurance coverage really is only intended for damage to your vehicle, not other property or bodily injuries from an accident.

Other things gap insurance does cover, according to Nationwide insurance:

Scroll to Continue

TheStreet Recommends

  • Theft: if your car is stolen, and not recovered, gap insurance may cover the difference between your auto insurance policy and the actual cash value of your car.
  • Vandalism: again, gap insurance would cover the difference between your auto insurance policy and the actual cash value of your car, and only in the event the car is totaled and no longer usable.
  • Fire
  • Flood
  • Tornado
  • Hurricane
  • Insurance deductible costs: In most cases, even if your car is in an accident covered by your gap insurance policy, you'll still have to pay your deductible. If the gap reimbursement is $4,000, for instance, and your deductible is $500, your total gap reimbursement will be $3,500.

Gap insurance doesn't cover:

  • Engine failure: gap insurance is only usable in the event of a total loss from a covered accident -- not, as an example, mechanical repairs.
  • Death: gap insurance is only for vehicle losses, and doesn't cover bodily injuries, medical expenses, lost wages or funeral costs.
  • Equipment on your vehicle not installed by the factory
  • Reimbursement for a trade-in or leased car used as a down payment, as gap insurance isn't really "replacement cost insurance."
  • Anything added to the loan or lease, like extended warranties, won't be covered.
  • It won't cover unpaid or overdue loan or lease payments.
  • Similarly, it won't cover security deposits or financial penalties on a leased vehicle.

Gap insurance essentially works as a supplement to your basic comprehensive and collision insurance on your car. You can't get gap insurance without having your vehicle covered by auto insurance first, but some gap policies will, as noted, cover your deductible. While some dealers may offer gap insurance on vehicles when you purchase them, most auto insurance companies will also offer it.

According to the Insurance Information Institute, you might want to consider gap insurance:

  • If you made a less than 20% down payment on your auto financing loan.
  • If the duration of your auto financing loan is 60 months or longer
  • Or if you're leasing a vehicle.
  • If you financed a car with little to no down payment, you'd be upside down (owe more than the vehicle's value) the minute you drove off the lot. It could be years before the loan amount and the car's insurance determined replacement value is balanced.
  • If you've traded in an upside-down car, the dealership would add what you still owe to the balance of the loan you take out on a new car, unless you paid the difference up front. If your car is totaled or stolen, you might not otherwise have some financial protection on what you still owe.
  • If the car you bought loses its actual cash value quickly, you'll probably be upside-down without a substantial down payment -- about 25% or more.
  • What reduces a car's actual cash value most quickly is driving it. If you put miles onto any vehicle quickly, your car's value will depreciate just as fast. Meaning you'll probably be dropping your car's actual cash value more quickly than your payments can be turned in.

How to Buy Gap Insurance

Gap insurance is offered by auto dealerships, auto finance companies, and independent insurance agents.

Almost all advisers recommend you purchase gap insurance from an insurance agency, not a dealership, as the gap insurance rates quoted most often at dealerships can be up to four times the amount of typical insurance rates.

Instead, before actually purchasing your vehicle, request a gap insurance quote from your automobile insurance agent or an independent insurance company. Gap insurance should be purchased right after securing a car loan.

Because gap insurance only applies to the length of your auto financing loan, once you pay off your loan you don't need gap insurance.

The premium for gap insurance is most often paid up front or included as part of your auto finance loan. But if you sell or refinance your auto loan before the loan has expired, you should receive a refund on it.

Do You Need Gap Insurance?

Now that you know what gap insurance is, what it covers, what it doesn't, and how to purchase it, the next logical question is: do you need it?

If your car is worth more than your auto financing loan, and your insurance company's actual value payout will be more than what you owe upon a total loss, you do not need gap insurance.

Similarly, if you can continue making loan payments or pay off your automobile loan despite a total loss, you don't need gap insurance.

You also do not need gap insurance if, in the event of a total loss, you won't need to replace the vehicle.

And lastly, if your auto financing loan is for a short period of time, like between six and 12 months, you don't need to buy gap insurance.