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When to Choose GAP Insurance for Your Vehicle


Buying a car or truck can make a big dent in your budget.

To keep yourself on firm financial ground in case of the unexpected, you may want to consider Guaranteed Asset Protection (GAP) insurance and an extended warranty for your vehicle.

Let's take a look at these optional protection plans and how they can help you save money.

What Is GAP Insurance?

GAP insurance is supplemental car insurance that bridges the “gap” between the amount your standard comprehensive and collision insurance will cover if your vehicle is stolen or totaled in an accident and the balance you have remaining on your auto loan or lease. Optional GAP coverage may be purchased at the same time as you buy or lease a new car at the dealership or through a finance company. If you did not elect coverage at the time of purchase, some finance companies will allow the coverage to be added for a period time after the loan is established. Keep in mind, you must also be the vehicle’s first owner or leaseholder.


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How Does GAP Insurance Work?

If your car is stolen or deemed a total loss following a wreck, your insurance plan will typically pay actual cash value (ACV), minus your deductible, to replace it. ACV is the amount the insurance company determines someone would reasonably pay for your car if the theft or accident had never occurred. Actual cash value takes into account:

  • Depreciation
  • Mileage
  • Wear and tear
  • Mechanical problems
  • Cosmetic condition
  • Supply and demand

In some cases, the ACV settlement you receive from your insurer might not be enough to replace your car with an equivalent vehicle and pay off the remainder of your original loan or lease. This could leave you stuck making payments on a vehicle that you don’t have or can no longer drive. That’s where GAP insurance comes in.


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Let’s say you bought a new car for $30,000 but you still owe $25,000 on your loan when you’re involved in an accident. After assessing the damage, your insurance company declares your vehicle a total loss and agrees to pay you the car’s depreciated value, which in this case is $20,000.

Everything seems fine until you receive a check for $19,500 — the amount of the settlement minus your $500 deductible. That’s when you realize you’ll have to shell out $5,500 of your own money to pay off your loan balance. And you’ll still be without a car to drive.

Keep in mind that most GAP coverages have a loan-to-value (LTV) maximum and will only cover to the LTV maximum limit of their coverage.

If you had been carrying GAP insurance on the vehicle, it may have covered the $5,500 difference. You’d still have to make arrangements to buy a new ride to get back on the road, but at least you wouldn’t be paying off a totaled car.

Keep in mind that most GAP coverages have a loan-to-value (LTV) maximum and will only cover to the LTV maximum limit of their coverage.

According to the Consumer Protection Financial Bureau, “loan-to-value ratio (LTV) is the total dollar value of your loan divided by the actual cash value (ACV) of your vehicle.” To put this in perspective, typically, when you make a down payment, you’re bringing down the LTV. That’s a good thing when it comes to GAP insurance — the lower your LTV, the better chance you have for full coverage.

Maximum LTV limits can vary, so you’ll have to check with your specific provider. 


How Much Does GAP Insurance Cost?

You can purchase GAP insurance through the dealership or lender that’s financing your car or directly from an insurance company. Typically, coverage costs between $400 and $700 when wrapped into your loan by the dealer and between $20 and $40 per year if you add it to your auto insurance policy.

Pros and Cons of GAP Coverage

As with most optional items you can select for a new car or truck, there are a number of pros and cons to carrying GAP coverage on your vehicle.

Pros of GAP Coverage Cons of GAP Coverage
Pays what your standard insurance doesn’t (some limits do apply) Useless if vehicle was bought with cash or had a large down payment
Can be purchased from dealer, lender, or insurance company Adds to overall cost of ownership
Relatively inexpensive if added to an auto policy Often goes unused

If you’re sold on GAP, take the next step and learn how to purchase it.

Is GAP Insurance Worth It?

GAP insurance generally makes a lot of sense if you:

  • Finance your vehicle with less than 20% down
  • Put a lot of miles on your vehicle, which decreases its value more quickly
  • Purchase a luxury car or SUV — they depreciate faster than less expensive vehicles
  • Extend your loan beyond 60 months to keep your payments lower
  • Trade in a car and roll the balance of the old loan into the new auto loan

GAP coverage is also a good idea — in some instances, even a requirement — if you lease rather than buy a car or truck. That’s because the market value of the vehicle would likely be lower than the amount still owed on the contract if the car was stolen or totaled during the lease period.

If you opt for GAP insurance, you probably don’t need to carry it the entire time you have the vehicle. Ideally, once you’ve paid down the loan to the point where the car is worth more than you owe, you should remove the GAP coverage. GAP insurance wouldn’t pay any additional reimbursement if the car was stolen or totaled.

Keep in mind, some GAP coverages are not refundable. For example, some plans will not allow you to remove the coverage after 60 days. That said, many providers offer a “free look” period during which you can add GAP and cancel before the end of the period for a full refund.

Many providers offer a “free look” period during which you can add GAP and cancel before the end of the period for a full refund.

The Takeaway

GAP insurance is designed to cover expensive car repair costs and ultimately save you money, but it isn’t for everyone and every situation.

Before purchasing any type of insurance take an honest look at your financial situation and consider how much risk you’re willing to take. Then, you can decide and ride with confidence, knowing that you’ve done all you can to protect yourself and your auto investment for years to come.

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