Is Gap Insurance Worth It? [EXPLAINED]

Gap insurance is a type of car insurance that covers the difference between the actual cash value of your vehicle and the amount you owe on your loan or lease if your car is totaled or stolen. 

Gap insurance can be a valuable protection for drivers who have a large gap between their car’s value and their loan balance, especially if they made a low down payment, have a high-interest rate, or have a long loan term. 

However, gap insurance is not always necessary or worth the cost, depending on your situation and preferences. 

In this article, we will explain what gap insurance is, how it works, what it covers, and how to evaluate its value for your needs.

Understanding Gap Insurance

What is Gap Insurance?

Gap insurance stands for guaranteed asset protection. It is an optional car insurance coverage that you can purchase from your insurer, lender, or dealership. Gap insurance is designed to protect you from owing more money than your car is worth if it is totaled or stolen.

How Does Gap Insurance Work?

If your car is damaged in an accident or by another covered peril, such as fire, vandalism, or theft, your comprehensive or collision coverage will pay for the repair or replacement of your car, up to its actual cash value (ACV). The ACV is the market value of your car at the time of the loss, minus depreciation and your deductible. 

However, if you financed or leased your car, you may owe more on your loan or lease than the ACV of your car. This is because cars tend to depreciate faster than you pay off your loan or lease. This creates a gap between your car’s value and your loan balance.

If you have gap insurance and your car is totaled or stolen, your insurer will pay the difference between the ACV of your car and the amount you owe on your loan or lease, minus any deductible. This way, you can avoid paying out of pocket for a car that you no longer have.

What Does Gap Insurance Cover?

Gap insurance covers the following situations:

• Your car is totaled in an accident that is covered by your collision coverage.
• Your car is stolen and not recovered, and the loss is covered by your comprehensive coverage.
• Your car is damaged by fire, flood, vandalism, or another covered peril under your comprehensive coverage, and the repair cost exceeds the ACV of your car.

Gap insurance does not cover the following situations:

• Your car is damaged but not totaled, and the repair cost is less than the ACV of your car.
• Your car is repossessed by your lender due to missed payments.
• Your car is totaled or stolen due to fraud, intentional damage, or illegal activities.
• Your loan balance includes additional fees or charges that are not related to the purchase price of your car, such as extended warranties, credit insurance, late fees, or rollover balances from a previous loan.
• Your deductible for comprehensive or collision coverage.

Evaluating the Value of Gap Insurance

Do You Need Gap Insurance?

Gap insurance is not required by law or by most insurers. However, some lenders or leasing companies may require you to purchase gap insurance as part of your loan or lease agreement. This helps protect them from losing money if you default on your loan or lease after your car is totaled or stolen.

Even if gap insurance is not mandatory for you, you may still want to consider buying it if you are at risk of having a large gap between your car’s value and your loan balance. This can happen if you:

• Made a low down payment (less than 20%) when you bought or leased your car.
• Have a high-interest rate on your loan or lease.
• Have a long loan term (more than 60 months).
• Have a rapidly depreciating car model.
• Drive a lot of miles per year.

On the other hand, you may not need gap insurance if you:

• Made a large down payment (more than 20%) when you bought or leased your car.
• Have a low interest rate on your loan or lease.
• Have a short loan term (less than 60 months).
• Have a slowly depreciating car model.
• Drive a few miles per year.
• Have enough savings to cover the gap in case of a total loss.

Benefits of Gap Insurance

The main benefit of gap insurance is that it can save you from paying thousands of dollars out of pocket for a car that you no longer have. This can help you avoid financial hardship and stress in case of a total loss. Gap insurance can also help you pay off your loan or lease faster and clear your credit history.

Another benefit of gap insurance is that it is relatively affordable compared to other types of car insurance. 

According to Insurify, the average cost of gap insurance ranges from $5 to $15 per month as an add-on to your comprehensive or collision coverage from your insurer. 

Alternatively, you can buy gap insurance from your lender or dealership as a one-time charge that is added to your loan or lease, typically between $500 and $700. However, this option may be more expensive in the long run, as you will pay interest on the gap insurance amount.

Factors to Consider in the Decision

Before you decide whether to buy gap insurance or not, you should consider the following factors:

• The value of your car: You can use online tools, such as Kelley Blue Book or Edmunds, to estimate the current market value of your car based on its make, model, year, condition, mileage, and features. You can also check the depreciation rate of your car model to see how fast it loses value over time.
• The amount you owe on your loan or lease: You can check your loan or lease statement to see how much you owe on your car, including the principal, interest, and any fees or charges. You can also use online calculators, such as Bankrate or NerdWallet, to see how much you will owe on your car over time based on your loan or lease terms.
• The gap between your car’s value and your loan balance: You can subtract the value of your car from the amount you owe on your loan or lease to see how big the gap is. If the gap is large (more than 20% of your car’s value), you may benefit from buying gap insurance. If the gap is small (less than 20% of your car’s value) or negative (you owe less than your car’s value), you may not need gap insurance.
• Your budget and savings: You should also consider how much you can afford to pay for gap insurance and whether you have enough savings to cover the gap in case of a total loss. If you have a tight budget and little savings, gap insurance may be worth the cost for peace of mind. If you have a flexible budget and ample savings, gap insurance may not be worth the cost for you.

Cost of Gap Insurance

How is Gap Insurance Calculated?

The cost of gap insurance depends on several factors, such as:

• The source of gap insurance: Gap insurance from your insurer is usually cheaper than gap insurance from your lender or dealership. This is because insurers charge a monthly or annual premium based on a percentage of your comprehensive or collision coverage, while lenders or dealerships charge a one-time fee that is added to your loan or lease amount.
• The value of your car: The higher the value of your car, the higher the cost of gap insurance. This is because the potential gap between your car’s value and your loan balance is larger for more expensive cars.
• The amount you owe on your loan or lease: The higher the amount you owe on your loan or lease, the higher the cost of gap insurance. This is because the potential gap between your car’s value and your loan balance is larger for longer or higher-interest loans or leases.
• The depreciation rate of your car model: The faster your car model depreciates, the higher the cost of gap insurance. This is because the potential gap between your car’s value and your loan balance grows faster for rapidly depreciating cars.

The Cost of Gap Insurance

According to Insurify, the average cost of gap insurance ranges from $5 to $15 per month as an add-on to your comprehensive or collision coverage from your insurer. Alternatively, you can buy gap insurance from your lender or dealership as a one-time charge that is added to your loan or lease, typically between $500 and $700.

To illustrate how much gap insurance costs in different scenarios, let’s assume that you bought a new car for $30,000 with a 10% down payment ($3,000), a 60-month loan term, and a 5% interest rate. Your monthly loan payment would be $513. Here are some examples of how much gap insurance would cost from different sources:

Is Gap Insurance Worth the Cost?

Whether gap insurance is worth the cost depends on how much you value the protection it offers and how likely you are to experience a total loss. Gap insurance can be worth the cost if:

• You have a large gap between your car’s value and your loan balance that would be difficult to pay off in case of a total loss.
• You have a high risk of totaling or losing your car due to factors such as driving habits, location, weather, crime rates, etc.
• You have a low cost of gap insurance compared to other sources or alternatives.

Gap insurance may not be worth the cost if:

• You have a small or negative gap between your car’s value and your loan balance that you can easily pay off in case of a total loss.
• You have a low risk of totaling or losing your car due to factors such as driving habits, location, weather, crime rates, etc.
• You have a high cost of gap insurance compared to other sources or alternatives.

To decide whether gap insurance is worth the cost for you, you should consider the following factors:

• The value of your car: You can use online tools, such as Kelley Blue Book or Edmunds, to estimate the current market value of your car based on its make, model, year, condition, mileage, and features. You can also check the depreciation rate of your car model to see how fast it loses value over time.
• The amount you owe on your loan or lease: You can check your loan or lease statement to see how much you owe on your car, including the principal, interest, and any fees or charges. You can also use online calculators, such as Bankrate or NerdWallet, to see how much you will owe on your car over time based on your loan or lease terms.
• The gap between your car’s value and your loan balance: You can subtract the value of your car from the amount you owe on your loan or lease to see how big the gap is. If the gap is large (more than 20% of your car’s value), you may benefit from buying gap insurance. If the gap is small (less than 20% of your car’s value) or negative (you owe less than your car’s value), you may not need gap insurance.

Your budget and savings: You should also consider how much you can afford to pay for gap insurance and whether you have enough savings to cover the gap in case of a total loss. If you have a tight budget and little savings, gap insurance may be worth the cost for peace of mind. If you have a flexible budget and ample savings, gap insurance may not be worth the cost for you.