Gap Insurance: What It Is and Why You Might Need It

In today’s high-price auto market, new vehicles often come with hefty price tags, and loans to match. But what happens if your car is totaled or stolen before the loan is paid off? That’s where gap insurance comes in. And it’s not just for those who finance through a dealership.

What Is Gap Insurance?

Guaranteed Asset Protection (GAP) insurance covers the difference, or “gap,” between what you owe on your car loan or lease and the car’s actual cash value (ACV) at the time it’s declared a total loss.

Most standard auto insurance policies only cover the current market value of the vehicle, not what you originally paid for it or what you still owe.

According to Edmunds, a new car can lose up to 20% of its value in the first year of ownership. And with average new car loan amounts exceeding $40,000 in 2023 (Experian), that gap can be thousands of dollars.

How It Works: A Real-World Example

Let’s say you purchase a new SUV for $45,000 and finance the entire amount. A year later, the car is totaled in an accident. Your auto insurer determines the car’s ACV is $36,000. But you still owe $42,000 on the loan.

Without gap insurance, you’d be on the hook for the $6,000 difference. With gap insurance, that shortfall is covered.

Do You Need It?

While many people get gap insurance through a dealer or lease agreement, you can purchase gap coverage separately through many auto insurers, even if you didn’t finance through the dealer.

You should consider gap insurance if:

• You made a small or no down payment.
• You financed the vehicle for 60+ months.
• Your car depreciates quickly.
• You’re leasing the vehicle.

Gap insurance is a smart move for many drivers, especially in today’s high-cost, high-loan environment. It provides peace of mind that your auto loan won’t outpace your insurance payout in the event of a total loss.

If you’re not sure whether gap insurance makes sense for you, contact our office to review your auto policy and explore your options.