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Do You Need Gap Insurance, and Is It Too Late to Add It?

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Key takeaways

  • Gap pays the difference between what your insurer pays for a totaled or stolen car (its actual cash value) and what you still owe on the loan or lease.
  • Triple-I suggests considering it if you put down less than 20 percent, financed for 60 months or longer, leased, or rolled old loan debt into the new one.
  • Gap from a dealer is often not insurance at all. Regulators in Washington and Texas suggest asking your own insurer before you sign at the dealership.

This guide is part of our car insurance coverage explained section. If your car was already totaled and you are short on the payoff, go straight to what to do when your car is totaled and you owe more than it's worth.

What does gap insurance cover?

The Consumer Financial Protection Bureau (CFPB) describes GAP (Guaranteed Asset Protection) as an optional product "intended to cover the difference between the amount you owe on your auto loan and the amount the insurance company pays if your car is stolen or totaled." Standard auto insurance "only pays an amount up to the value of your vehicle."

The Washington State Office of the Insurance Commissioner gives a worked example:

Without gapWith gap
Loan on a new vehicle$30,000$30,000
Actual cash value at the time of the crash$25,000$25,000
Insurance payout$25,000 minus your deductible$25,000 plus $5,000
Loan amount you still owe$5,000$0
The gap between a $30,000 loan and a $25,000 actual cash value payout You owe $30,000 loan balance Collision pays $25,000 actual cash value $5,000 gap Gap coverage pays the red section. Without it, you pay it, plus your collision deductible, on a car you no longer have.
Figures from the Washington State Office of the Insurance Commissioner's gap insurance example. Bar lengths are to scale.

Why would you owe more than the car is worth?

Depreciation. Triple-I says "most cars lose 20 percent of their value within a year," and that a standard policy pays "the current market value of the vehicle at the time of a claim." The Texas Department of Insurance puts it simply: if your car is stolen or totaled, your auto insurance pays what the car is worth now, not what you paid for it or what you still owe.

The totaled car payoff estimator compares your loan payoff to a likely actual cash value so you can see whether you have a gap today.

Who needs gap insurance?

Triple-I suggests considering gap on a new vehicle if you:

The Texas Department of Insurance uses the same down-payment and 60-month markers, saying the gap "can be thousands of dollars" in those cases.

You likely do not need it if you paid cash, put a large amount down, or already owe less than the car is worth. On a lease, check your contract first: Triple-I notes gap "is usually rolled into your lease payments."

Dealer gap vs insurer gap: what is the difference?

This is where most of the money is. Gap can come from three places, and the NAIC lists all of them: "a lender, your car dealer, or an insurance company or agent."

Dealer or lender productGap from your auto insurer
Is it insurance?Often not. Washington's insurance regulator says it is "often a debt waiver agreement they advertise as gap insurance"Yes, regulated as insurance
Typical costWashington's regulator says dealer debt waivers "are often overpriced"Triple-I says adding it with collision and comprehensive costs "only about $20 a year" on most policies
How you payRolled into the loan, which the CFPB says "increases what you'll pay in total interest"Added to your premium
Getting outCheck the contract. The CFPB says you can cancel optional add-ons and may be due a refund if you sell, refinance or prepay; Washington's regulator warns some waivers cannot be canceled or returned if you pay off earlyWashington's regulator says you can cancel it if you pay off your loan
Who helps if there is a problemThe Texas Department of Insurance says it "can't help" with dealer or bank products that are not insuranceYour state insurance department

Required or not? The CFPB says that generally "you cannot be required to buy" GAP to get an auto loan. If a dealer says it is required, the CFPB says to ask where the sales contract says so. If the contract does not explicitly say it is required, the CFPB says you cannot be required to buy it.

The Federal Trade Commission's car add-on guidance names gap insurance among optional add-ons and says "it's OK to say, 'no' or 'not right now'." Saying not right now at the dealer leaves you free to compare your insurer's price.

Is it too late to add gap insurance?

Often it is not. You do not have to buy gap at the dealership. The NAIC says it can be bought from an insurance company or agent, and the Washington insurance regulator notes your insurer "may never mention gap insurance or offer it to you, but they must sell it to you if you ask." That last rule is Washington's; in other states, call your insurer and ask whether your car and loan qualify and what the cutoff is.

Two practical points:

  1. Ask before you shop if you can. Washington's regulator suggests asking your insurer about gap "before shopping for a new vehicle" so you can compare its price with the dealer's.
  2. If you already bought dealer gap, you may be able to switch. The CFPB says you have the right to cancel optional add-on products and reduce your costs. Get your insurer's gap in place first, then cancel the dealer product and ask about a refund.

What does gap insurance not cover?

Washington's regulator says gap "doesn't cover interest the lender charges you, late fees or missed loan payments," or "extended warranties you add to your auto loan." The Texas Department of Insurance lists exclusions in many policies that can reduce a payout, including overdue payments, unpaid finance charges, warranty costs, balloon payments, a deductible, and damage from a previous accident. Read the exclusions before you rely on it.

How long should you keep gap insurance?

The Texas Department of Insurance says to cancel it "when you owe less than your vehicle is worth," which "usually takes about two years," and to cancel if you pay off the loan or sell the car. Compare your payoff with a car value guide at each renewal.

If you are planning a purchase, our guide to insurance requirements on a financed car explains what lenders can require on top of gap.

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FAQ

Is gap insurance worth it? It can be if you owe more than the car is worth, which Triple-I and the Texas Department of Insurance say is common with a small down payment, a long loan or a lease. Once your balance falls below the car's value, it pays nothing.

Can I add gap insurance after buying the car? In many cases, yes, through your auto insurer. Washington requires insurers there to sell it on request. Elsewhere, ask your insurer about its eligibility rules.

Is gap insurance required? Generally not for a loan, according to the CFPB. Triple-I says it is generally required for a lease.

Does gap insurance cover my deductible? Not always. The Texas Department of Insurance lists the deductible among items some gap policies exclude.

Can I cancel dealer gap insurance? The CFPB says you have the right to cancel optional add-ons and may be entitled to a refund when you sell, refinance or prepay. Washington's regulator warns some dealer debt waivers cannot be canceled or returned, so read your contract.

Sources

This article is general information, not insurance or legal advice. Gap products and cancellation rights vary by state, product and contract.