Depending on where you purchase a gap insurance
policy, you could pay anywhere from $3 per month up to $60 per month for this coverage. If your car is totaled
or stolen, gap insurance—or Guaranteed Asset Protection insurance—covers the difference between your vehicle’s actual cash value and the remaining amount you owe on the loan or lease. Without this coverage, you could be stuck paying that difference out of pocket for a car you can’t even drive. Between dealerships, car insurance
providers, banks, and credit unions, there are several ways to get gap insurance—but not all of these options are made equal. We’re here to walk you through the basics of gap insurance, including how much it costs, when you need it, and where to find the most affordable gap insurance policies. How much does gap insurance cost?
Gap insurance can cost anywhere from $3 to $60 per month, which comes out to around $40 a year or up to $700 annually. The cost of gap insurance varies pretty drastically. It depends largely on where you buy it—plus a few other elements.
Adding gap insurance to your existing car insurance policy is usually the most affordable option, starting at around $3 per month. However, car insurance companies calculate quotes
—including the cost of gap insurance—based on a wide range of factors. Your vehicle value, driving record, and credit score play a huge role in your insurance rates and gap insurance cost. Your car dealer or lender may also offer gap insurance—but it’ll usually cost a lot more. In general, these places charge a lump sum averaging $400 to $700 for annual gap insurance.
On top of that, this amount often gets added to your car loan amount, so you might also have to pay interest on it. Depending on your interest rate, you could be paying over $700 a year just for gap insurance.
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How does gap insurance work?
Gap insurance covers the difference—the “gap”—between a car’s actual cash value (ACV) and what you owe on the lease or loan if the car is stolen or declared a total loss. Sometimes, circumstances lead you to owe more on a loan than your car’s ACV, which results in having negative equity or being upside down on your car loan
. Having gap insurance makes sure you won’t owe that difference to your lender if something happens to your car. For example, let’s say you finance a new car worth $40,000. Two years later, your vehicle is totaled. The insurance claims adjuster calculates that the car was worth $23,000 pre-accident, but your auto loan balance is $27,000.
Your collision insurance
policy will offer a payout of the car’s ACV (minus your deductible), so you’ll still owe your lender $4,000—even though you can’t drive the car anymore. If you have gap coverage, you shouldn’t have to pay that $4,000. When is gap insurance worth it?
Unless you’re financing a vehicle, there’s no need to have gap insurance. If you are financing, some lenders may require you to have gap insurance (plus collision and comprehensive insurance
) as part of your loan terms. If you aren’t required to have it, however, it still may be a good investment to make in a few cases. Here’s when it may be beneficial to have gap insurance coverage.
You made a small down payment
If you financed a new or used car with a relatively expensive auto loan and didn’t make a significant down payment
, you’ll have a wider gap between the car’s value and what you owe. Having gap insurance is especially important if your monthly payments are on the lower end, too. You can cancel your gap insurance policy
once you owe less than your car is worth. You have a longer loan term
Average loan terms are 72 months, but if your loan term is longer, you’re almost certain to be upside down for some of that time. The more time you have to pay off your loan, the longer it takes for your loan amount to match the depreciating value of the car.
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On average, new vehicles lose up to 20% of their value in the first year. Depending on the make and model of your vehicle, it may depreciate quicker than other cars. High mileage will also speed up the rate of depreciation.
You can calculate your vehicle’s actual cash value by using online tools like Kelley Blue Book
or Edmunds. If you find out your car is worth less than what you still owe, gap insurance is a must. It’s a good idea to check the depreciation rate and value of your car each year to make sure you’re not upside down on your loan. You lease your car
Those lower monthly payments are nice when you’re leasing a car
, but it also means you’re paying less of the principal. Most lessors require gap insurance or include it within your lease terms—but if not, you’ll want to make sure you’re covered. You financed more than just your car
On top of financing your vehicle, you can roll other services—like an extended warranty or dealer-offered services—into your car loan. That increases the amount you owe on your loan, making it easier to get upside down as your car depreciates.
Should you buy gap insurance from an insurance company or dealership?
Most major insurance providers like Progressive
or Allstate
offer gap insurance as an add-on to your auto insurance policy for an affordable cost. If your policy includes comprehensive and collision coverage, for instance, your annual premium will only be about $40 to $60 more with gap coverage. Not every insurance company provides gap insurance, though. In that case, you’ll either need to purchase it through a dealership, credit union, or lender—or you can find an insurance provider that offers standalone gap insurance
. A standalone gap insurance policy will be more expensive than adding it to your car insurance coverage, but it’ll likely be cheaper than buying it through a car dealership. The cost of gap insurance from a dealership may be several hundred dollars a year—and it’ll be added to your loan amount and charged interest. That’s why it’s usually best to buy gap insurance from an insurance company.
The bottom line
Without gap insurance, you may end up owing money on a car you can no longer drive. So if you suspect you owe more on your car than it’s worth, a gap insurance policy is a wise investment.
Not all gap insurance providers are created equal, though. Dealerships will likely charge you far more than a big-name insurer. Get quotes from multiple insurance companies before settling on a policy to land the best rate.
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