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GAP insurance (Guaranteed Asset Protection) covers the difference between what your car is worth and what you still owe on your loan if the car is totaled or stolen. It solves one specific problem: new cars depreciate faster than most loans pay down, so you can owe more than the car is worth and be left paying for a car you no longer have. Here is when GAP insurance is worth buying and when it is not.
Key Takeaways
- GAP covers the difference between your car’s value and your loan balance if it is totaled or stolen.
- It is most useful with a small down payment and a long loan, when you are “underwater.”
- Skip it if you put 20% or more down, bought used, or already have positive equity.
- Buy it from your auto insurer, not the dealer, where it is far cheaper.
What Problem Does GAP Insurance Solve?
A new car loses roughly 20% to 30% of its value in the first year. If you financed most of the price with a long loan, you can owe more than the car is worth from day one. For example, say you buy a $35,000 car with $1,000 down and a 72-month loan. After 18 months the car might be worth about $26,000, but you still owe around $29,000. If it is totaled, your comprehensive coverage pays the $26,000 value, leaving you owing $3,000 on a car you no longer have. GAP insurance covers that $3,000.
When Does GAP Insurance Make Sense?
- You financed 80% or more of the purchase price.
- Your loan term is 60 months or longer.
- You put down less than 20%.
- You are leasing, since most leases include or require GAP.
- You are in the first two to three years of a new car loan.
When Should You Skip It?
- You put 20% or more down, so you start with equity.
- You bought used, since the steepest depreciation already happened.
- Your loan term is 48 months or less, so you pay down faster.
- You are more than two to three years in and likely have positive equity.
Where Should You Buy GAP Insurance?
Not from the dealer. Dealers often sell GAP for several hundred dollars rolled into your loan, where you also pay interest on it. Your own auto insurer usually offers the same coverage for only about $20 to $40 a year, which is far cheaper. Banks and credit unions fall in between, often a couple hundred dollars at loan origination. If you need GAP, add it to your auto policy rather than buying it through the dealer’s finance office.
How Do You Know If You Need It Now?
Look up your car’s current value at Kelley Blue Book (kbb.com) or Edmunds and compare it to your loan payoff balance. If you owe more than the car is worth, you are underwater and GAP has value. If the car is worth more than you owe, you have positive equity and do not need it.
FAQ
What does GAP insurance cover?
The difference between your car’s actual cash value and your remaining loan balance if the car is totaled or stolen. It does not cover repairs or your deductible.
Do I need GAP insurance?
Mainly if you put little down, have a long loan, or are leasing, when you likely owe more than the car is worth. If you have equity, you do not need it.
Where is the cheapest place to buy GAP insurance?
Usually your own auto insurer, often $20 to $40 a year, which is much cheaper than the dealer’s version rolled into your loan.
When can I cancel GAP insurance?
Once your car is worth more than your loan balance, you no longer need it. Check your values and drop it then to stop paying for coverage you no longer require.
Bottom Line
GAP insurance is worth it when you owe more than your car is worth, which is common with a small down payment and a long loan, but a waste once you have positive equity. Check your car’s value against your loan balance, buy it from your auto insurer if you need it, and cancel it once you are no longer underwater. For more, see our guides on how much car insurance you need, when to drop collision coverage, and car loan vs lease.
This article is for educational and informational purposes only and is not insurance advice. Coverage, pricing, and rules vary by insurer and state. Check your car’s value and loan balance, and confirm details with a licensed insurance professional.
