What is GAP insurance?

GAP insurance isn’t a mandatory coverage on a car insurance policy but it’s highly recommended in certain situations. This coverage helps cover the difference between the actual value of a vehicle and what you might owe on a car loan.

There are times when GAP insurance makes a lot of sense — and other times when you might not need it. Read on to learn more.

How much is GAP insurance typically?

The average cost of GAP insurance might vary from one insurance company to another, but you can generally expect to pay about 6% of the cost of your comprehensive and collision coverages on your auto policy.

If you want to figure out the cost of GAP insurance per month, simply divide the dollar amount by the number of months in your policy renewal. Usually, policies renew annually or every six months. 

Just like your auto policy in general, there can be variables that affect the cost of GAP insurance. The amount you pay could depend on all of the following:

• Where you live
• The value of your vehicle
• Your driving record

If you’re buying a car that requires this coverage, make sure you contact your current insurance company or one that will quote you auto insurance policy rates with a GAP insurance cost option.

Which companies provide GAP insurance?

Most auto insurance companies will provide options for GAP insurance. You can look to the big, nationally recognized companies such as Allstate, Farmers, or Progressive. These giants insure cars in every state, and all have agents that can give you a GAP insurance price. 

Small, regional companies with long histories and solid financial ratings can also provide a cost for GAP insurance. Do some research on smaller auto insurers before obtaining a quote or purchasing a policy.

Auto insurance companies aren’t the only option for getting GAP insurance. In some cases, you can get GAP coverage from the dealership when you’re purchasing a car. How much GAP coverage costs through an auto dealer can also vary but, on average, you can expect to pay about $500 as a one-time fee under these circumstances.

You’ll want to know if the dealership has included GAP insurance costs in your offer so you can choose to accept the dealer’s coverage or obtain it from your auto insurance company. 

Can GAP insurance help you save money on car repairs?

GAP insurance won’t help you save money on car repairs. This coverage only comes into play if you’re in a car accident, and the damage to your vehicle results in a total loss.

Let’s say you own a car and have taken out a loan for 72 months at a 6% interest rate. You purchased the vehicle new for $25,000 and borrowed the entire amount. Three months after you buy the car, you total it in an accident. 

In that first year of financing, you’re paying mostly interest on the loan and not principal. Thus, you may still owe $25,000 on the car while the actual cash value is $23,000. If you don’t have GAP insurance, your liability could be $2,000. This is the difference between what you owe and what the insurer will pay you for a total loss.

Also, it’s worth noting that the average new car depreciates by about 10% after it’s driven off the lot, so you may owe more than it’s worth right off the bat.

Is GAP insurance worth it on a new car?

Your individual circumstances will determine whether the average cost of GAP insurance justifies the benefit. Your decision to pay GAP insurance costs on a new car might depend on the terms of your loan.

If we use the example above, perhaps you’ve secured no-interest financing with a repayment term of 24 months. In this instance, you will have paid off a big chunk of principal by the third month, and the actual value of the car may be more than you owe on the loan.

By contrast, you may have a much larger liability if your interest rate is a lot higher than 6%, and you’ve extended repayment terms to 84 months. You may also have purchased a vehicle that depreciates more rapidly, especially if it’s brand new. Paying for GAP insurance is certainly worth it in this case.

Get the True Cost of GAP Insurance

You can receive auto insurance rates and GAP insurance quotes from a number of quality insurance companies. Make sure to compare options in your area and decide what coverage is right for you.

Case Studies: What is GAP insurance?

Case Study 1: John’s Car Accident

John recently purchased a brand new car for $30,000 and financed the entire amount. Unfortunately, just a few months later, he gets into a severe accident that results in a total loss of his vehicle. At the time of the accident, John still owes $28,000 on his car loan.

The actual cash value of the car is assessed to be $25,000. Without GAP insurance, John would be responsible for paying the $3,000 difference between what he owes and what the insurer will cover.

Case Study 2: Sarah’s Loan Terms

Sarah bought a new car and secured a loan with a repayment term of 60 months and a 5% interest rate. She financed the entire purchase price of $20,000. Six months later, Sarah gets into an accident that leads to the total loss of her vehicle.

At that point, she still owes $18,000 on her car loan. The actual cash value of the car is determined to be $16,000. With GAP insurance, Sarah would be covered for the $2,000 difference between the loan amount and the actual value of the car.

Case Study 3: Mark’s High-Depreciation Vehicle

Mark purchases a new luxury car that is known for its high depreciation rate. He takes out a loan with a repayment term of 72 months and a 7% interest rate. The car’s initial value is $50,000, but Mark financed the entire amount. After one year of ownership, Mark gets into an accident resulting in a total loss.

The actual cash value of the car has depreciated to $40,000, but he still owes $45,000 on his loan. Without GAP insurance, Mark would be responsible for covering the $5,000 difference between the loan balance and the insurance payout.