Should You Buy GAP Insurance From the Dealer?

Guaranteed Asset Protection, commonly known as GAP insurance, serves as a financial safeguard for individuals who finance or lease a vehicle. Its purpose is to cover the difference between a car’s actual cash value and the outstanding balance on a loan or lease in the event of a total loss, such as theft or a severe accident. This coverage is a common consideration for car buyers due to the rapid depreciation of vehicles, which can quickly create a financial deficit between what is owed and what an insurer will pay.

Understanding GAP Insurance

GAP insurance protects a vehicle owner from a financial shortfall if their car is declared a total loss. When a vehicle is totaled or stolen, a standard auto insurance policy pays out only the car’s actual cash value (ACV) at the time of the loss, not the original purchase price or the amount still owed on the loan. Since cars begin to lose value the moment they are driven off the dealership lot, often by 20% or more in the first year, the ACV can be significantly less than the loan balance, especially early in the loan term.

This disparity between the ACV and the loan balance creates the “gap.” For example, if a car is purchased for $30,000 and totaled a year later, its ACV might be $24,000, while the remaining loan balance could still be $28,000. Without GAP insurance, the owner would pay the $4,000 difference to the lender. GAP insurance covers this financial difference. Some policies may even cover a portion of the primary insurance deductible, typically up to $1,000.

Assessing Your Need for GAP Coverage

Considering GAP insurance is relevant in several common scenarios where the likelihood of owing more than a vehicle’s value is high. This includes when a borrower makes a small or no down payment on a new or used car. With a low initial investment, the loan balance remains high relative to the car’s depreciated value, making a significant gap more probable. Financing a vehicle with a long loan term, such as 60 months or more, also increases the need for GAP coverage, as longer terms mean slower equity buildup.

Another factor is financing a vehicle known for rapid depreciation, as certain makes and models lose value faster than others. GAP insurance can also be beneficial if negative equity from a previous trade-in is rolled into the new loan. Conversely, GAP insurance may be less necessary if a substantial down payment was made, if the loan term is short (e.g., 2-4 years), or if the amount owed is already less than the vehicle’s current value.

Sources for GAP Insurance

Consumers have several avenues for acquiring GAP insurance, each with distinct advantages and disadvantages regarding cost and convenience. Car dealerships frequently offer GAP coverage at the time of purchase or lease, often bundling the cost into the vehicle loan. While convenient, this can be a more expensive option because the cost may be subject to interest over the life of the loan. Dealer-provided GAP insurance typically ranges from $400 to $700 as a flat fee, which is then financed. Some dealer policies may offer benefits such as no deductible or higher coverage limits, and they often allow flexibility in switching primary auto insurance carriers.

Independent insurance companies and direct insurers also provide GAP coverage, often as an add-on or endorsement to an existing auto insurance policy. Purchasing GAP insurance from an insurance provider is generally less expensive, with costs typically ranging from $20 to $40 per year when added to a policy. This option avoids paying interest on the GAP coverage itself, as it is not rolled into the vehicle loan. Some banks and credit unions also offer GAP protection as a voluntary product, which can waive the remaining loan balance in the event of a total loss. These financial institutions may offer competitive pricing.

Key Factors When Choosing GAP Coverage

When selecting GAP coverage, examine the specific terms and conditions of the policy, regardless of where it is purchased. Policy coverage limits are a significant consideration, as some GAP policies may only cover a portion of the outstanding balance or have a maximum payout, such as up to 150% of the loan-to-value ratio.

Exclusions are another important aspect to review. GAP policies typically do not cover vehicle repair costs, rental car expenses, or damages to other property or individuals. They also generally exclude coverage for pre-existing damage, late payments, excessive mileage, or if the vehicle is used for certain commercial purposes. The deductible from the primary auto insurance policy will still apply and is typically subtracted from the initial payout before GAP coverage takes effect.

Finally, compare the total cost of the GAP coverage over the entire loan term, including any interest if financed. Obtain quotes from multiple sources—dealerships, insurance companies, and financial institutions—and carefully read the fine print of each policy.