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You walk onto the lot looking for a sensible car for your commute—a used one if you can get it. But on the way to look at that economy hatchback that gets 40 miles per gallon, the dealer notices your eye wander toward that big, beautiful luxury sedan—the German one. He says, “I know you had your heart set on the hatchback, but we’re running a special this month. I can get you in that bad boy today for zero down at 2.9% APR. You know you want to test-drive. Come on, let’s do it.” The next thing you know, you have a $65,000 car with a $700 a month car payment.
The only problem is that as soon as you get the keys and drive the car off the lot, it’s now worth just $40,000. If you get into an accident and total the car, you’ll be on the hook for that extra $25,000. That’s where a little thing called gap insurance comes in.
So, how does gap insurance work?
We’ll tell you what it is and why—if you follow our advice—you never should need it.
Let’s dive in!
What is gap insurance?
Guaranteed Auto Protection, also known by its pun of an acronym of gap, is insurance that covers the difference between the vehicle’s actual cash value versus what you still owe on the loan. Here are some situations in which gap insurance can come in handy:
Do you have the right auto insurance coverage? You could be saving hundreds!
- If you lease your car. (Don’t lease a car!)
- If you finance your car and with less than a 20% down payment. (Don’t finance a car loan whether you have a down payment or not.)
- If the term of your loan is longer than 60 months. That’s five years!
- If you finance a car that depreciates faster than the average car. Think big, luxury sedans. But most cars lose 60% of their value within the first five years.1
Now, full disclosure: If you haven’t figured it out from the above, we’re always going to tell you to buy your car with cash. We hate debt and would never recommend you get yourself into any of these scenarios.
How does gap insurance work?
When you get into an accident and total your $22,000 car, the insurance company will pay you the Kelly Blue Book value of your car. Let’s say your insurer pays you $15,000. But you still owe close to $22,000 because you’re an idiot who financed a car. So, the gap is $22,000 minus $15,000, which is $7,000. If you have gap insurance, your insurance covers the “gap” so you can pay off the loan. Here’s a visual:
|Starting Loan Balance||Actual Cash Value||Difference (the Gap)|
(Note: You can also expect to pay your deductible. Sometimes gap insurance reimburses you for your deductible and sometimes it doesn’t. You’ll have to check your policy,)
It also doesn’t matter how you destroy your car. If your insurance company deems the car a total loss, your gap insurance will kick in after your basic collision or comprehensive insurance kicks in (to cover up to the current value of the car). Here are some terrible things that can destroy your car:
If your insurance company deems the car a total loss, your gap insurance will kick in after your basic collision or comprehensive insurance kicks in.
What gap insurance doesn’t cover
So now we know how gap insurance works and what it covers. When you get into an accident and total your car, gap insurance covers the difference between what the car is worth and how much you owe— and sometimes the cost of the deductible.
What it doesn’t cover is, frankly, a lot. And that causes a lot of confusion. Here are some of the things gap insurance won’t cover:
- Car payments if you lose your job or go on disability
- Vehicle repairs
- Car rental while your car is in the shop
- Extended warranties
Gap insurance doesn’t cover any of these things. In fact, gap insurance literally just covers the difference between what your car is worth and what you owe on the loan and nothing else.
How much does gap insurance cost?
Let’s talk dollars and cents (and since we’re here, whether or not gap insurance makes sense). There are two places you can buy gap insurance: from the finance company at the dealer and your regular car insurance provider. If you buy at the point of sale—either from the dealership or the bank financing your loan—it’s usually outrageously expensive and you pay everything up front. That’s actually another way of saying they just add an extra couple hundred bucks to the amount you’re borrowing. So, don’t buy gap insurance from the dealership or bank.
If you already have a car loan you can’t get out of, check your coverage with an independent agent to see whether or not gap insurance is included and if you still need it. Bonus: An agent can also check the rest of your policy to make sure you’ve got the right coverage you need at the best price. Want to know if you have the right car insurance? Download our free Car Guide today!
Get an insurance checkup today
Gap insurance aside, if you’re curious about your coverage in general or just want to shop around for a better rate, our independent insurance Endorsed Local Providers (ELPs) can sit with you and go through all of your car insurance needs for multiple vehicles. In fact, most people who use an insurance ELP save around $700! Think of what you could do with all that extra money in your pocket!
Find your independent agent today!