Should you buy GAP insurance for your new car?

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Ask a Lender
April 6, 2017 | Updated September 26, 2017


Key Points

Understand GAP insurance

  • GAP pays the difference between what you owe and what your car is worth.
  • Shop around for the best insurance offer.
  • It’s unusual for a lender or dealer to require GAP insurance.
  • Discontinue coverage when you no longer need it.
  • If you paid for GAP in advance and pay off your car early, you may get a refund.

You buy a new car and before the ink is dry on the dotted line, you get in an accident. The car is totaled. Thankfully, you have car insurance. Are you covered?

Perhaps not — at least, not completely. Many car insurance policies only cover the cash value of the vehicle, which could be less than what you still owe. This is where Guaranteed Asset Protection (GAP) insurance can save the day.

Fill the GAP

If you need to make a claim on a car that is totaled or stolen, GAP insurance fills the gap between what you still owe and what the car is worth.

The Insurance Information Institute says it’s a good idea to buy GAP insurance for a new vehicle if you made a down payment of less than 20 percent; financed for 60 months or longer; leased the vehicle; purchased a vehicle that depreciates faster than average; or rolled over negative equity from an old car loan into the new loan.

In addition to covering the difference between the car’s value and what is still owed, GAP insurance is often required when leasing a vehicle. On the other hand, if you own your car outright, or the car is worth more than what you owe on it, you don’t need GAP insurance.

Negotiate the price

GAP insurance is often offered at dealerships as an add-on, along with other financial products like extended warranties. The price of these add-ons, including GAP insurance, is negotiable.

You are not required to purchase GAP insurance from the dealership. Shop around. Insurance companies, including your existing auto insurance company, may offer a better deal on GAP insurance than the dealership.

If you choose to purchase GAP insurance from the car dealer, you may have the option to finance the insurance as part of your auto loan. Keep in mind that doing so will increase the amount you borrow and pay. Ask your lender if it offers financing for your GAP insurance.

Mandatory GAP

If you’re told that you’re required to purchase GAP insurance as part of an auto loan, keep in mind that such a request is “highly unusual,” according to the Consumer Financial Protection Bureau (CFPB).

“If your lender or dealer says you are required to purchase a product like GAP insurance or an extended warranty, ask them to show you where your sales contract says it is required,” the CFPB says on its website. “If the contract does not explicitly state that it’s required, you cannot be required to purchase it.”

Ending coverage

One advantage of having GAP insurance is that you can get rid of it when you no longer need it.

Once you’ve paid off enough of the car that there’s no longer any gap — the car is worth more than what you still owe — it’s time to discontinue the coverage.

Some insurers automatically cancel GAP insurance after a certain number of years, so be sure to check with your insurance company before adding GAP insurance to see what their policy is.

Although you won’t automatically get refunded for your GAP insurance once you pay off your vehicle, if you paid for GAP insurance in advance and pay off your vehicle early, you may be refunded the unused portion of the insurance. Contact the insurance company after paying off the car to ensure you receive any refund owed to you.

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