Is Gap Insurance Worth It? A Complete Guide for Car Owners
Leasing a new vehicle is exciting. It also means you have more financial responsibilities. One of the common questions people ask after financing or leasing a vehicle is: Is gap insurance worth it? The answer depends on a things, like how much you still owe on your loan how much your vehicle is worth and how much you paid upfront.
In this guide we will explain what gap insurance is, how it works, who should buy it and how much it costs. By the end you will know if gap insurance is right for you.
What Is Gap Insurance?
Gap insurance is also known as Guaranteed Asset Protection insurance. It covers the difference between what your standard auto insurance pays after your vehicle is totalled and what you still owe on your loan or lease.
Most auto insurance policies only pay the cash value of your vehicle, which is what it is worth after depreciation. Vehicles lose value quickly in the first few years.
Example
For example lets say you bought a vehicle for $40,000. After a while you still owe $36,000 on your loan. Your vehicle is only worth $30,000. If your vehicle is totalled your insurance company might only pay $26,000. Without gap insurance you would still owe $6,000 to your lender. Gap insurance helps cover that difference.
How Does Gap Insurance Work?
For people the answer is yes. Gap insurance provides protection when you owe more on your loan than your vehicle is worth. Since new vehicles depreciate quickly many owners owe more than their vehicle is worth after buying it.
If your vehicle is totalled during this time gap insurance can prevent you from making payments on a vehicle you no longer own.
Is Gap Insurance Worth It?
For people the answer is yes. Gap insurance provides protection when you owe more on your loan than your vehicle is worth. Since new vehicles depreciate quickly many owners owe more than their vehicle is worth after buying it.
If your vehicle is totaled during this time gap insurance can prevent you from making payments on a vehicle you no longer own.
When Gap Insurance Is Worth It
Gap insurance is an idea if you made a small down payment financed your vehicle for a long time or leased your vehicle. It is also an idea if your vehicle depreciates quickly or if you rolled over negative equity into a new loan.
When Gap Insurance May Not Be Worth It
Gap insurance may not be necessary if you paid cash for your vehicle made a down payment or owe less than your vehicle is worth. You should review your loan balance. Compare it to your vehicles value each year. Once you owe less than your vehicle’s worth gap insurance may not be necessary.
How Much Does Gap Insurance Cost?
$20 to $60
per year, if you add it to your existing auto insurance policy.
$400 to $900
if you buy it from a dealership.
You should compare prices before making a decision. Buying gap insurance from your auto insurer is often cheaper than buying it from a dealership.
Pros and Cons of Gap Insurance
Pros
- Protects you from paying a lot of money after your vehicle is totaled
- Gives you peace of mind during the time when your vehicle depreciates the most
- Is relatively affordable
- Is especially valuable for people who finance or lease their vehicles
Cons
- Is not useful once you owe less than your vehicle’s worth
- Does not cover repairs or minor accidents
- Can be more expensive if you buy it from a dealership
- Has coverage limits and exclusions depending on the provider
Where Can You Buy Gap Insurance?
You can buy gap insurance from:
Auto insurance companies
Vehicle dealerships
Banks and credit unions
Auto finance companies
Before buying you should compare prices, coverage limits and exclusions. Do not assume that the dealership offers the value.
Frequently Asked Questions
Does gap insurance cover theft?
Yes gap insurance covers theft if your vehicle is declared a loss and your comprehensive insurance covers the theft.
Is gap insurance required?
No gap insurance is not required in cases. However some lease agreements require it. Some lenders may recommend or require it for certain loans.
Can I cancel gap insurance?
Yes you can cancel your gap insurance policy once you owe less than your vehicle’s worth. If you bought it from a dealership you may also be able to get a refund depending on your contract and state laws.
Is gap insurance the same as coverage?
No gap insurance is not the same as coverage. Full coverage typically includes liability, collision and comprehensive insurance. Gap insurance only covers the difference between your insurance payout and your remaining loan or lease balance.
Does gap insurance cover engine failure?
No gap insurance does not cover engine failure caused by use or lack of maintenance. It only covers loss caused by an accident, theft or natural disasters.
Final Thoughts
So is gap insurance worth it? For people the answer is yes. Gap insurance can protect you from a financial burden if your vehicle is totalled or stolen. However if you have built equity in your vehicle or paid for it outright gap insurance may not be necessary. The key is to evaluate your loan balance your vehicles value and your financial situation before making a decision. Gap insurance is, about protecting yourself from depreciation. If losing your vehicle could leave you owing a lot of money gap insurance is often an investment that provides financial security and peace of mind. Gap insurance is a thing to have when you are buying a new vehicle. It is an idea to think about getting gap insurance when you are financing or leasing a vehicle. Gap insurance can help you avoid problems if your vehicle is totalled or stolen.