“Guaranteed auto protection,” better known as gap insurance, is a specialized insurance product geared toward drivers who would have trouble paying off their auto loan or lease if their car were totaled or stolen. In this article, we weigh the pros and cons to consider before buying gap insurance and explain how you can get it inexpensively if you do decide to buy.

Key Takeaways

  • Gap insurance—also known as guaranteed auto protection—is a type of insurance that reimburses car owners when the amount they receive for a total-loss claim is less than they owe on their car loan or lease.
  • This insurance pays the difference between the car's value at the time of the accident or theft and the amount that's still outstanding on their loan or lease.
  • A gap insurance policy is usually much more expensive when purchased from the car dealership rather than directly from a major auto insurance company.
  • Gap insurance makes the most sense for people who lease their car or choose a long loan payoff period.

How Gap Insurance Works

If you get into a major wreck, your car insurance policy's collision coverage (if you have any) won't pay the cost of replacing your car with a brand-new vehicle. Instead, you’ll get a check for what a car comparable to yours would go for on the used-car market. Insurers call this the vehicle’s actual cash value

The problem is that cars depreciate quickly during their first couple of years, so it’s fairly easy to owe the lender or leasing company more than the car is worth early on, especially if you put little or no money down when you got it. In fact, the average automobile loses nearly a third of its value after just two years of driving.

Gap insurance can help take care of the shortfall. Suppose you bought a $30,000 car and two years later it's stolen and never recovered. Because depreciation is most severe during those first couple of years, the car is now worth only $21,000 on the market, yet you still owe the lender $24,000. If you have gap coverage, the insurance carrier will kick in $3,000 to cover the difference.

Note that while gap insurance has saved you from paying that $3,000 out of pocket, you'll still be getting just $21,000 from your insurance company with which to replace your former $30,000 car. Gap insurance doesn't cover that particular gap.

Do You Need Gap Insurance?

Gap insurance is a niche product, and some drivers may be able to skip it altogether. For example, if you made a substantial down payment on the car, there’s a relatively small chance you will end up upside-down on your loan.

Purchasing gap insurance makes the most sense if:

  • You put down less than 20% when you bought the vehicle.
  • Your loan payoff period is five years or more.
  • You’re leasing the car.
  • Your particular vehicle has a history of depreciating quickly.
  • You put a relatively high number of miles on the odometer each year, making the car depreciate even faster.

Even if you have a small amount of negative equity in your car, gap insurance isn’t a no-brainer. If you have the resources to pay the difference out of pocket, you might be better off just taking your chances. Gap coverage, like other forms of insurance, makes the most sense for people who wouldn’t be able to handle a worst-case scenario otherwise.

Also note that lenders rarely require that you buy gap insurance in order to obtain financing, according to the federal Consumer Financial Protection Bureau. If the car dealer suggests otherwise, the bureau says you should, "contact the lender yourself to find out if that is true."

Gap insurance is often built into car leases, so it’s a good idea to check the contract before getting coverage on your own. That way, you won't end up paying twice for insurance coverage you already have.

If you've purchased gap insurance, check your loan balance from time to time and cancel the insurance once you owe less than the book value of your vehicle.

Getting the Best Deal on Gap Insurance

There’s a good chance the car dealer will try to sell you on its own gap coverage before you drive off the lot. However, dealers often charge substantially more than major insurance companies, so it pays to shop around a bit, starting with your current auto insurer. Many, but not all, major insurers will allow you to add gap insurance to your existing auto insurance policy.

On average, a dealership will charge you a flat rate of $500 to $700 for a gap policy. By contrast, a major insurer will typically price it at 5% to 6% of the collision and comprehensive premiums on your auto insurance policy. So, for example, if you pay $1,000 a year combined for those two coverages, you’ll only have to kick in $50 to $60 extra to protect your loan with gap insurance.

One of the other advantages of going with a big-name carrier is that you can usually drop the gap coverage once it no longer makes financial sense. It's worth checking the National Automobile Dealers Association (NADA) guides or Kelley Blue Book periodically to get an idea of how much your car is really worth and compare that to your loan balance. If your loan balance is less than your car's value, you no longer have any gap to worry about.

The Bottom Line

Gap insurance can be a useful product, but only for those with significant negative equity in their car. That includes drivers who put little money down or have a protracted loan payoff period. If you're interested in cutting your car insurance costs, not paying for gap insurance that you don't really need is one easy way to save some money.