What Is Gap Insurance and How Does It Work?

If your vehicle is stolen or totaled, gap insurance may be able to help.

The key takeaways

  • When the remaining amount on your car lease or loan exceeds the vehicle’s value at the time, gap insurance will pay.
  • Gap coverage is only worth it if you lease a car, or owe more on your loan than the car is worth.
  • If you don’t own a car loan, lease or mortgage, gap insurance is not necessary.
  • Gap insurance is not necessary for life. You can stop using gap insurance if your vehicle’s value is less than your car loan.

Gap insurance pays the difference between your car’s value and your balance on your loan or lease. If you do not have gap insurance, it will only apply to drivers who do.

While other insurance may pay the vehicle’s value at the time of the accident, you are responsible for paying your car loan.

Gap insurance is a great option.

Gap insurance Coverage

Gap insurance adds to the collision coverage and comprehensive coverage for your car if it is stolen or totaled. Gap insurance is usually required by lenders for the duration of your loan or lease. You will need to have both collision and comprehensive coverage.

Collision and comprehensive insurance only pay what the car is worth in the event of an accident or theft. Gap insurance is available if you owe more than the car loan or lease.

Some gap insurance may also cover your collision or comprehensive deductible. This amount is subtracted from a claim payout.

How Does Gap Insurance Function?

Let’s take a closer look at the above example to get a better understanding of gap insurance.

Let’s assume that your car is worth $25,000 at the time it is stolen and that you have a $30,000 mortgage. Comprehensive insurance will cover the car’s value at the time it is stolen. However, you must first pay a $500 deductable. Your insurance company pays $24,500, but you still owe $5,000.

Gap insurance pays the final $5,500 to cover your car’s total cost. You’ll need to pay the loan balance and the cost of buying a new car without gap insurance.

Is it worth buying gap insurance?

Gap insurance is not necessary for many people. If you don’t have a car loan or lease, or your loan payment is less than the value of your car’s actual value, then you don’t need it.

If you have a newer or lease, you need to consider whether you can afford the difference between the car’s value and its remaining balance. Gap coverage is a benefit if you are unable or unwilling to deal with this situation in an emergency.

Gap insurance providers

Gap insurance can only be purchased within three years of purchasing a new vehicle. While the guidelines of insurers may vary, companies may need one or both of these:

  • Your car should not be more than two- to three years old
  • You are the original owner.

You can purchase gap insurance in three ways:

  • As part of your regular insurance payments, your auto insurer will provide it.
  • A company that only sells gap insurance. Gap Direct is a website that sells standalone gap insurance.
  • Through the dealer or lender, rolled into your monthly loan payments. This arrangement means that you will pay interest over the term of the loan on the cost of your gap coverage, which makes it much more expensive.

You can buy directly from your dealer or lender

  • Check your car loan contract to determine if gap insurance is required. It’s not required by all lenders, but it is rare. Your lender may require that you purchase collision and comprehensive coverage.
  • If you lease your car from a dealer, they may include gap insurance. Make sure to review your lease agreement.
  • You may be able remove gap insurance that you have purchased from your dealer. If you change providers, make sure you have coverage.

Definition of gap insurance

Gap insurance (or guaranteed asset protection) is optional coverage that covers the difference between the vehicle’s value and the amount you owe to your car when it is stolen or destroyed. This coverage can be added to a comprehensive or collision payout. It is limited in its ability to pay as much as your car’s actual value.

Insurance companies that offer gap coverage

The following insurance companies offer standalone gap insurance as an add-on to their car insurance policies:

American Family.


Liberty Mutual.

All over the country



Some companies might offer gap insurance, or similar policies as part of a loan. If you finance your car through an insurer’s bank, State Farm can provide gap coverage, but not for auto policies.

What is the cost of gap insurance?

According to the Insurance Information Institute, gap insurance is typically charged by auto insurers at a cost of around $20 per year or a few dollars per month. The cost of your insurance depends on many factors, such as the value of your car. Comprehensive and collision coverage are also required. Compare car insurance rates from at least three companies to find the best one for you.

According to United Policyholders (a non-profit consumer group), lenders charge a flat fee between $500 and $700 for gap insurance. Credit unions might charge less.

Keep in mind that if you add coverage to your loan you will also be paying interest. Edmunds reports that the average interest rate on a new car runs to almost 6%. This means that you could spend more than $800 to get three years of gap coverage through a dealer, compared to $60 from your auto insurance.

Prices and interest rates can vary so make sure to check with your dealer or car insurance company for accurate comparisons.

There are other options to gap insurance

You can also protect your vehicle by purchasing gap insurance. These are just a few of the other options you have.

  • Leasing/lease payment: Although gap insurance is often used interchangeably, loan/lease paymentoff differs from that of gap insurance in several key ways. Gap coverage can only be provided if you own a new vehicle, while loan/lease payment may be available for those with older vehicles. In addition to the claim check, loan/lease paymentoff pays a percentage of your car’s actual value (often around 25%), instead of your outstanding debt.
  • You might consider purchasing new car replacement insurance. However, this coverage is more expensive. This coverage pays for a replacement vehicle of the same make and type, less your deductible.
  • You may be eligible for better car replacement coverage if you don’t own a car. If things get worse, your insurer might offer better car replacement coverage to help you pay off your outstanding loan balance.