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What Is Gap Insurance?

Gap insurance covers the financial “gap” between a vehicle’s depreciated value and the amount owed on a car loan or lease. In the event of theft or an accident, this protection ensures you do not owe more than the vehicle is worth. It pays the difference between what the car is worth and how much you owe.

How Does Gap Insurance Work? 

In the event of a total loss, such as theft or a severe accident, gap insurance bridges the “gap” between your car’s actual cash value (ACV) and the remaining balance on your auto loan or lease. It is common for standard auto insurance to cover the ACV of your vehicle, which may be less than the amount of financing you owe. By purchasing gap insurance, you prevent yourself from being forced to repay a loan for a vehicle you no longer own.

For example, if you have a 5-year car loan with a balance of $10,000 and are in an accident that totals your car and is worth only $6,000, you would have a gap of $4,000. Your collision would cover only the $6,000, while gap insurance would pay the $4,000.

Car Value
Car Loan
Gap Insurance
You Owe…


The eligibility requirements for gap insurance can be different for each insurance carrier. However, they typically include specific conditions, such as it being a new car (often no older than 5 years old). The type of vehicle, the loan amount, and when you purchased the vehicle can also come into play. Call your insurer to learn their requirements. 


There are a few benefits that come with gap insurance coverage: 

  • Loan or lease balance coverage: The balance of your loan, including principal and interest, is typically covered by gap insurance once your standard policy has been paid. 
  • Ignores depreciation: Depreciation is what happens to all vehicles. As they are driven and get older, their value decreases. Gap insurance will pay the balance of your loan regardless of depreciation. 
  • Deductible coverage: Some gap insurance policies will also pay your comp or collision deductible

Some lenders will require that you have gap insurance, especially if they know you are going into a loan with negative equity. Negative equity generally happens when you still have a loan on a car and want to trade it in. The prior loan balance is added to the new one, so you automatically have a gap. Some gap policies will help cover this as well. 

Coverage Exceptions 

There are a few limitations in gap insurance. Gap insurance will not cover the following:

  • Regular vehicle maintenance, repairs, and mechanical breakdowns
  • Overdue loan or lease payments, interest, and penalties
  • Vehicle down payment and any add-ons omitted from the original agreement

How Much Does Gap Insurance Cost? 

Gap insurance costs can vary widely between insurers. On average, gap insurance may cost between $200 and $600 for a one-time payment or $20 to $40 per year when included in your auto insurance premium

Gap insurance premiums can be based on:

  • The vehicle type and its value
  • Loan amount
  • Deductible 
  • Length of policy
  • Where you live
  • Driving history
  • Age and credit score

Insurance providers typically offer more competitive rates than dealerships when it comes to gap insurance. The dealer may add markups and fees, making it more expensive. Comparing quotes and options is essential to determining the most cost-effective option.

Should You Get Gap Insurance? 

Gap insurance may not be for everyone, but there are many circumstances where it may benefit you. 

Consider Gap Insurance If… 

Consider gap insurance if you have or will soon experience any of the following:

  • A substantial loan or lease amount is required to purchase or lease a new car.
  • You’re buying a vehicle with a high rate of depreciation.
  • You have no down payment or a small down payment.
  • A long-term loan is used to finance a car (for example, 60 months or more).
  • You hold negative equity from a previous vehicle loan that will be carried over to a new one.
  • You live in an area with a high theft or accident risk.
  • You drive a lot. Frequent driving increases the likelihood of early depreciation.
  • You have a bad driving history, including accidents resulting in total loss.
  • It’s a brand new car purchase.
  • You want to ensure you will not owe more than the car’s value if you are in an accident with a total loss.


In a total loss, gap insurance provides financial protection to vehicle owners. Some advantages include:

  • Financial security: Gap insurance pays off your loan during a total loss, so you will not have to reach into your own pocket.
  • Flexible coverage: You can get gap insurance from your standard auto policy or the car dealer.
  • Protection against depreciation: All cars depreciate, and certain types of vehicles depreciate at a faster rate than others. 
  • Easy claims process: You will not have to fight for your money in the event of an incident. 
  • Coverage Options: Some gap insurance provides other coverages, such as a deductible.


Despite gap insurance’s benefits, it’s essential to consider its drawbacks before purchasing. Consider these disadvantages:

  • Limited coverage: Gap insurance only covers the difference between the ACV and the loan or lease balance, not other expenses.
  • Additional cost: You are adding extra fees to your insurance premiums.
  • Depreciation dependency: As the value of your car stabilizes, gap insurance has a lower value.
  • Unavailability for older cars: You usually cannot get gap insurance on older cars.
  • Dealership cost: Gap insurance can be expensive if you get it through the dealership.

How to Get Gap Insurance 

Obtaining gap insurance is pretty simple. If you decide you want to get it, follow these steps.

  1. Evaluate your needs. Consider your loan/lease terms, vehicle depreciation rate, and down payment when deciding whether gap insurance is necessary.
  2. Contact your auto insurer. Find out if you can add gap to your current standard auto insurance policy. If not, compare quotes from others.
  3. Understand your coverage. Be sure to understand how the policy works and what the exclusions are.
  4. Purchase gap insurance. Decide which policy you want to use, inform the insurer or dealer, and pay.
  5. Keep records. Keep proof of coverage if you need to submit a claim.

Putting It Together 

Gap insurance coverage can provide financial assistance when the value of your car has depreciated to less than the loan or lease that you owe on it. If you are in an auto accident and your car is totaled, you do not want to be stuck paying for a vehicle you can no longer drive. 

Typically, you can add gap insurance for a nominal fee to your standard insurance policy or purchase directly from the car dealer. 

Frequently Asked Questions 

Yes, as most leased cars are new and you pay on them like a loan, you could still end up with a gap between the vehicle’s value and the lease balance.

Gap insurance pays off the loan you have left on the vehicle, whereas a new car replacement will pay to replace your car with a new one, regardless of depreciation. 

Gap insurance may be transferable, but not always. You will want to read the policy’s terms and conditions. 

Yes, because full coverage is only going to pay to replace the vehicle at its current value, which is usually depreciated causing a gap.

Find an auto insurance policy that meets your needs.

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Find an auto insurance policy that meets your needs.

Get a quote