Gap Insurance

What is gap insurance?

Gap insurance (also known as loan/lease payback) is an optional auto insurance policy that kicks in if your vehicle is stolen or declared a total loss. When your loan amount exceeds the value of your car, gap insurance pays the difference. For example, if you owe $30,000 on your loan but your automobile is only worth $25,000, your loan/lease payback coverage will cover the $5,000 difference, minus your deductible.


What is the purpose of gap insurance?

Depreciation is protected by gap insurance. When you acquire a car, its value begins to fall. If you loan or lease a vehicle, depreciation creates a difference between what you owe and the value of the vehicle. Let's look at an example with and without gap insurance:

For example, assume you borrow $35,000 to buy a new automobile. You've had it for a few years and have made all of your payments on time. It is now worth $20,000, but you still owe $26,000 on your loan, resulting in a $6,000 difference. If the car is totaled, your insurance company will pay you $26,000 for it (minus your deductible). You would only receive $20,000 if you did not have gap insurance (minus your deductible).

What exactly does gap insurance cover?

When your car is totaled in an accident, gap insurance kicks in. If your automobile is stolen, this policy will reimburse the vehicle's actual cash value (ACV) less your deductible. Remember that gap insurance does not cover other property or injuries sustained in a collision, nor does it cover engine failure or other repairs.

Is gap insurance required?

Gap insurance is not required by any insurer or state, however it may be needed by some leasing businesses. When purchasing a new automobile, some dealerships may automatically add gap insurance to your loan; however, you have the option to refuse this coverage.

Is it worth getting gap insurance?

Loan/lease payback coverage is a helpful precaution when there is a substantial disparity between the value of your automobile and what you owe on it. Consider purchasing gap coverage in the following situations:

  • You're renting a car: Gap coverage may be required by lenders on leased cars.

  • You put down less money on a new car: If you put down less than 20%, you may wind up having negative equity on the car as soon as you drive it away from the dealership.

  • You have a longer car finance term: The longer your vehicle is financed, the more likely it is that you will owe more on it than it is worth.

  • You want to protect yourself against depreciation: Some automobiles depreciate faster than others, so understanding the typical depreciation for your vehicle will help you decide if you need gap coverage.

  • You have a debt that is being rolled over: If you owe more on your loan than your vehicle is worth at the time of renewal, gap insurance can help protect you against negative equity.

How much does gap insurance cost?

The cost of gap coverage varies from one insurance company to the next. Insurance provides loan/lease repayment coverage for an average of $5 per month. 

What is the duration of gap insurance?

When you add gap insurance, it is valid for as long as you keep the policy. However, you will not require gap coverage for the full term of the loan. When you owe less than the car's value, you can remove the gap insurance.