Gap Insurance Guide
What gap insurance covers, when you need it, costs by source, and exclusions to understand
Key Numbers
Insurer Cost
$20–$90/yr
Dealer Cost
$500–$700
Underwater Trade-Ins
26.6%
Leases
Usually Required
Gap insurance (Guaranteed Asset Protection) covers the difference between what your car is worth and what you still owe on your loan or lease if the vehicle is totaled or stolen. Without it, you could owe thousands on a car you can no longer drive. As of Q2 2025, 26.6% of trade-ins had negative equity — the highest in four years.
How Gap Insurance Works
| Scenario | Amount |
|---|---|
| Loan balance owed | $25,000 |
| Insurer pays (actual cash value) | −$20,000 |
| Your collision deductible | −$500 |
| Gap insurance pays the rest | $4,500 |
Without gap coverage, you'd owe that $4,500 on a car you can no longer drive. With gap coverage, your loan is settled and you can move on.
What It Covers
Covered
Total loss from collision, vehicle theft (not recovered), fire, flood, vandalism, and natural disaster — specifically the difference between your car's actual cash value (ACV) and the remaining loan or lease balance.
Not Covered
Partial damage or repairs, your collision deductible, rolled-over negative equity from a previous loan, extended warranties or add-ons financed into the loan, missed or late payments, or lapsed coverage periods.
Requires full coverage: Gap insurance only works alongside comprehensive and collision coverage. Without both, gap insurance won't pay out.
Costs & Where to Buy
Where you buy gap insurance dramatically impacts cost. Insurance companies charge $20–$90/year, while dealerships charge $500–$700 as a flat fee — often rolled into your loan where you also pay interest on it.
| Source | Cost | 5-Year Total | Notes |
|---|---|---|---|
| Auto insurer add-on | $20–$90/yr | $100–$450 | Cancel anytime; cheapest option |
| Standalone policy | $200–$300 | $200–$300 | One-time; may not be refundable |
| Credit union / lender | $250–$400 | $250–$400+ | Often financed into loan (adds interest) |
| Dealership | $500–$700 | $600–$900+ | 300%+ markup; interest if financed |
Dealer 5-year total includes estimated interest. A $700 gap policy at 7% APR over 60 months adds ~$85 in interest.
Cost Savings Example
| Source | 5-Year Cost | You Save |
|---|---|---|
| Auto insurer ($40/yr) | $200 | $485+ |
| Dealership ($600 + interest) | $685+ | — |
Cancel when above water: Once your loan balance drops below your car's value, gap insurance is unnecessary. With an insurer, simply remove it from your policy. If you paid a dealer upfront, request a prorated refund.
When You Need It
Gap insurance is most valuable when you're at high risk of being “underwater” (owing more than your car is worth). The table below covers common scenarios and their associated risk level.
| Scenario | Gap Risk | Why |
|---|---|---|
| New car, 0% down, 72+ months | High | Slow principal paydown + rapid early depreciation = large gap |
| Leased vehicle | High | Lease payments cover depreciation only; no equity builds. Often required by lessor |
| Rolled-over negative equity | High | Starting deeply underwater from day one (note: gap won't cover the rolled-over amount itself) |
| EV or luxury vehicle | Medium–High | Many EVs and luxury cars lose 40–50%+ value within 3 years |
| High APR (>7%) loan | Medium–High | More payment goes to interest, slowing equity buildup |
| 10% down, 60-month loan | Medium | Moderate risk; underwater for 1–2 years typically |
| 20%+ down, ≤48-month loan | Low | Likely above water from day one; equity builds fast |
| Used car (2–3 yrs old), short loan | Low | Steepest depreciation already happened; gap unlikely |
When It's Not Necessary
You generally don't need gap insurance if you own the car outright (no loan, no gap), your loan balance is already below the car's market value, you made a 20%+ down payment, or you're on a short loan term (36–48 months) that builds equity faster than the car depreciates. Check your vehicle's value on KBB or Edmunds against your loan balance to assess your position.
Watch for coverage caps: Some insurers (e.g., Progressive) offer “loan/lease payoff” coverage capped at 25% of your car's ACV rather than unlimited gap coverage. Read your policy's fine print.
Exclusions & Alternatives
Gap insurance has important limitations. Understanding exclusions helps avoid surprises if you need to file a claim.
Common Exclusions
| Exclusion | Details |
|---|---|
| Deductibles | Your collision/comprehensive deductible ($500–$1,000 typically) is your responsibility. Some policies offer a deductible waiver for extra cost. |
| Rolled-over negative equity | Prior loan debt added to your new loan is not covered — only the current vehicle's depreciation gap. |
| Financed add-ons | Extended warranties, paint protection, and other extras financed into the loan are excluded. |
| Partial damage / repairs | Gap only applies to total-loss or unrecovered-theft events, not repairable damage. |
| Missed payments | Gap pays the gap at time of loss, not accumulated late or missed payments. |
| Lapsed coverage | If your auto insurance or gap policy has lapsed at the time of loss, no payout. |
Alternatives to Gap Insurance
| Alternative | How It Works | Best For |
|---|---|---|
| New car replacement | Pays to replace totaled car with same make/model/year (not loan balance) | Brand-new cars (≤2 years old) |
| Loan/lease payoff | Similar to gap but capped (often 25% of ACV) | When true gap isn't available |
| Larger down payment | 20%+ down keeps you above water from day one | Buyers with cash available |
| Shorter loan term | 36–48 months builds equity faster than depreciation | Buyers who can handle higher payments |
Sources
- 1.Insurance Information Institute — What Is Gap Insurance?
- 2.Edmunds — Negative Equity and Underwater Car Loans Data (Q2 2025)
- 3.Consumer Financial Protection Bureau — Shopping for Auto Insurance
- 4.National Association of Insurance Commissioners — Auto Insurance Guide
- 5.Kelley Blue Book — What Is Gap Insurance?
This content is for educational and informational purposes only and does not constitute financial, tax, or legal advice. Consult a qualified professional for guidance tailored to your situation.