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Gap Insurance Definition, How It Works, and When to Buy

File Photo: Gap Insurance Definition, How It Works, and When to Buy
File Photo: Gap Insurance Definition, How It Works, and When to Buy File Photo: Gap Insurance Definition, How It Works, and When to Buy

Gap insurances?

Gap insurance protects you if you total your automobile and your payout doesn’t meet your finance or lease arrangement. If your automobile loan exceeds its book value, gap insurance might help.

How Gap Insurances Works

It’s common to owe more on a car loan than its value because autos degrade fast. Carfax reports that the typical automobile depreciates 10% in the first month.

Your auto insurance provider will compensate you based on the car’s actual worth after depreciation, not the price you purchased, the cost of a new one, or the amount you owe on your loan or lease. Gap insurance helps.

Example: You bought a car two years ago and owed $20,000 on your financing arrangement. Depreciation reduces your car’s cash value to $15,000. In the event of a totaled automobile due to an accident or theft, your car insurance coverage will cover $15,000. Even without a car, you may deposit $15,000 toward your automobile loan and still owe $5,000.

Gap insurance covers the $5,000 “gap,” the difference between the refund and remaining automobile debt.

Situations to Consider: Gap Insurance

Car financing with low or no down payment: Make a hefty down payment to avoid becoming upside down on your vehicle loan upon driving off the lot. It may take years for the loan amount and the car’s cash value to match.

If you trade in an upside-down automobile, the dealership will add the remaining debt to the loan balance of the new car unless you pay the difference upfront. Having your automobile wrecked or stolen might result in this increased debt.

Drive frequently: Few things devalue an automobile quicker than frequent use. As you drive more, your car’s value depreciates quicker than your payments can keep up.

Long-term automobile loan (above 60 months): Long-term loans take longer to reach the break-even point, where the balance and value equalize.

Do I need gap insurances?

If you financed your car with little down or plan to operate it in a way that might quickly lower its resale value, such as extended road trips or harsh roads, gap insurance may be a sensible decision. It may be an intelligent alternative if your auto loan is longer than five years.

Is gap insurance required?

Gap insurance is optional, but certain financial agreements need it. Review your auto loan details to see if gap insurance is necessary. Gap insurance may be required for automobile leasing.

What is the cost of gap insurance?

All auto insurance costs depend on the state, driving record, age, vehicle, and other criteria. The insurer may recommend adding gap insurance to your other coverage. Car shops may provide gap insurance, but it may cost more than adding it to your existing policy.

Bottom Line

Optional gap insurance covers the difference between a car’s cash value and loan or lease debt. In a total loss, gap insurance covers the “gap” between the driver’s automobile insurance payout and their financial balance.


  • Gap insurance covers the gap between your car’s value and your loan or lease.
  • An extended loan term or no down payment means you owe more than the automobile is worth, so gap insurance makes sense.
  • Gap insurance costs vary by state, driving record, and vehicle.
  • Your auto insurance policy may provide gap insurance as an endorsement or separately from the dealer. Compare each solution’s pricing to find which one fits your needs best.

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