Should I Get Gap Insurance on a Used Car?
Gap insurance is a good idea for a used car if its value is worth less than what you owe on your loan. Learn more here!
Written by Shannon Fitzgerald
Reviewed by Amy Bobinger
You may want to get
gap insurance
for your used car if the value of your car is less than what you owe on your car loan
. This most typically occurs with newer models, long loan terms, and small down payments.According to the Insurance Information Institute (III), a new car depreciates in value by as much as 20% in its first year of ownership. If you’re unlucky enough to experience a total loss incident shortly after your purchase, the insurance payout from your
collision
or comprehensive coverage
will likely come up short of your total loan amount. Fortunately, adding gap coverage to your
auto insurance
policy helps protect you from making loan payments on a vehicle you no longer drive. But how does gap insurance work exactly, and is it worth it for a used vehicle? Let’s take a look. When is gap insurance worth it for a used vehicle?
While gap insurance is important coverage for a new vehicle, it’s not always necessary protection for a used car. In fact, it’s generally not recommended that you purchase gap coverage for a used vehicle unless you owe more on your car’s loan than your vehicle’s actual cash value (ACV).
This imbalance between your vehicle’s loan amount and ACV is referred to as negative equity, or being “upside down” on your auto loan. The faster a car depreciates, the more likely negative equity is going to occur. Here are a few situations in which you can expect this with a used car:
- The model is under three years old—though depreciation is most rapid during the vehicle’s first year of ownership, it still experiences a faster loss of value the newer it is.
- You made a small down payment—if you paid less than 20% on your loan, your loan balance may still be more than the current value of your vehicle.
- You have a long loan term—car loans longer than 60 months (or five years) can lead to negative equity as interest builds up.
- The car gets a lot of mileage—depreciation occurs more quickly in vehicles that drive great distances on a regular basis.
- You rolled over negative equity—if you still owed money on a loan before a trade in, you may have rolled this over into a new loan for another vehicle.
Since an insurance company only pays out as much as the vehicle’s ACV, gap insurance grants peace of mind to drivers whose cars are worth less than their loans after taxes, fees, and warranty costs are factored in.
Pro Tip If you’re ever unsure of your vehicle’s ACV, you can take a look at the estimated market value for its model year, trim, and configuration in your area through sites likeKelley Blue BookorEdmunds.
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What is gap insurance?
An acronym for guaranteed asset protection, gap insurance covers the difference between how much you owe your lender and your car’s ACV—generally the maximum amount car insurance companies will pay you after a total loss event.
Here’s an example: you just brought home a 2020
Jeep Compass Sport
and a car thief drives off with it that night. Law enforcement is unable to recover it, so your insurance provider pays out your Jeep’s market value. Since your Jeep is newer and you only put 10% down on your loan, though, you still owe your lender $24,400 in total. The problem? The payout from your comprehensive coverage only came to $17,800, leaving you responsible for $6,600 on a Jeep you no longer own. Gap insurance, in this situation, will take on most or all of that payment depending on your deductible. This way, you don’t have to take a financial hit making monthly payments on a car that’s been stolen or totaled.
Do you need gap insurance on a used car?
Whether or not you should purchase a gap insurance policy depends on your used vehicle’s depreciation rate and how much you owe on your loans. But is gap insurance ever a required coverage, like
PIP
or uninsured motorist insurance
is in certain states? Not usually. While some loan companies may require you to have collision and comprehensive coverage, gap insurance tends to be optional. That said, some leasing companies may include gap insurance coverage automatically, which is already factored into the cost of your lease.
How to purchase gap coverage
If your used car’s loan or lease is worth more than the value of the car, there are a few places from which you can purchase coverage:
- From a car dealership—your dealer will usually offer you gap coverage as part of your financing bundle. Though this can be a convenient way to secure coverage, your gap insurance may be included in your loan, meaning you could be paying interest on it.
- From your lender—similar to purchasing gap insurance through your dealer, you can buy it through your lender with the caveat that you may be charged interest on your gap premiums.
- From an auto insurance company—most major insurers, likeNationwideandAllstate, allow you to add gap insurance to a new or existingfull coverage policy. Though you typically must have collision insurance and comprehensive insurance to add gap coverage, this is generally the more affordable route since you won’t be paying interest.
Cost of gap insurance
Though the cost of gap insurance coverage varies depending on individual factors (as is the case with all insurance rates), you typically won’t pay more than $5 to $40 extra per month if you go through an insurance company.
In general, you can expect your gap insurance to cost 5% to 6% of your full coverage premiums. To find the best car insurance policy for both your budget and your needs, however, it’s a good idea to
compare insurance quotes
from at least three different insurers. If you choose to purchase gap coverage through your dealer or lender, it’ll usually cost you a one-time fee between $300 and $700.
Alternatives to gap insurance for your used car
Some insurers, like
Progressive
and Farmers
, offer a similar insurance coverage add-on called lease payoff coverage. Loan/lease payoff insurance also handles the difference between your car’s ACV and your vehicle’s ACV, but only covers up to 25% of your vehicle’s value. New car replacement insurance
is also available through certain insurers for vehicles that are under a certain age—usually less than three years old. With this coverage, your insurer will pay you the value of a new car from the same make and model if you total your car. Not all insurers offer new car replacement coverage, though.“I would 11/10 recommendJerry. I was originally quoted $700+ for insurance for my new car, but by using Jerry I got my payments down to $320 a month. They also have a great support team ready to answer any questions!” —Tobias F.
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What is the purpose of gap insurance?
Gap insurance covers the difference between the amount you still owe on your loan and your car’s actual cash value. In the event that an insurer deems your car totaled and pays out the market value on your vehicle, this prevents you from paying out-of-pocket to settle your loan balance.
How much does gap insurance cost?
If you purchase gap insurance through an insurance company, you can typically expect to pay 5% to 6% of your full coverage premiums per month—usually between $5 and $40.
Gap insurance through a lender or dealer typically has a one-time cost between $300 and $700.
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