What is Gap Insurance?

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Gap insurance is critical for some buyers. At the same time, it can be a waste of money for others. Do not let a car salesman or insurance agent pressure you into buying gap insurance without first knowing exactly what it is.

Before we get into who should consider buying gap insurance and defining it, it’s important to make clear one group who will never require gap insurance: those who own their car outright. If you did not borrow money to purchase a vehicle, you can close this page and be on your merry way (or read on but know that you don’t have to buy this coverage option for yourself!). However, most people who purchase a vehicle do so while utilizing various types of financing, so it’s essential to understand gap insurance. 

Gap insurance protects against the depreciation losses of a vehicle that is greater than the balance you owe a creditor on that vehicle. For instance, imagine taking out an extended 6-year loan on a car. A total loss accident a year after purchase would leave you owing more than it's worth even after the insurance payout because most of the payments over the last year went straight to interest and the car has also depreciated by a significant amount.

How It Works

  • Standard car insurance does not pay what you owe on a car.
  • Car insurance typically pays actual cash value, ACV, unless specified otherwise.
  • Gap insurance is the coverage that will pay the gap between what the car is worth and what you owe.

Gap insurance often comes down to the financial stability of the purchaser. Negotiations with the lender can fall short when you have bad credit or no credit. The worse the loan terms are; the more likely gap insurance is needed.

Gap Insurance is Recommended

A total loss car accident leaves you with the possibility of owing more than what the vehicle is worth; especially if any of the examples listed above is the case. It's hard to believe, driving a new car off the car lot can depreciate a vehicle, but new cars are notorious for just that. A serious accident or theft of a new car shortly after purchase can put you in the position of owing more than it's worth. If you don't have the cash to cover the difference, gap insurance is your answer. On the other hand, some people have no use for gap insurance. If any of the following examples apply to you, gap insurance is not necessary.

Gap Insurance Not Recommended

  • Large down payment on a car purchase
  • Excellent deal on the car price
  • Short term car loan, three years or less
  • Paid in full car purchase

The less you owe on your vehicle the better. Obviously, if you don't have a car loan, you do not need gap insurance. Just remember to cancel the coverage once you owe less than the value of the car. Keep up with the value of your vehicle with Kelly Blue Book. In face of a total loss, the last thing you'll want to deal with is a car payment when you can't even drive your car. Be prepared and get gap insurance if you are at risk of owing a higher amount than the current value of the vehicle.