“Guaranteed auto protection,” better known as gap insurance, is a specialized indemnity product geared toward drivers who would have trouble paying off their auto loan if the car was totaled or stolen. For some drivers, having this extra security blanket for their credit offers them peace of mind. 

However, determining whether gap insurance is really worth the expense might be a big question for you as a new car owner. That's because buying or leasing a new car has already put a big dent in your wallet, especially when you add in all the taxes and fees that go along with a new set of wheels.

So, it’s easy to be skeptical when someone tries to sell you additional insurance on top of your regular car insurance coverage. In this article, we'll review some pros and cons you should consider before buying gap insurance.

Key Takeaways

  • Gap insurance—also known as guaranteed auto protection—is a type of car insurance that protects car owners when the amount received for a total loss claim is less than the amount owed on the car loan.
  • Gap insurance pays the difference between the car's value at the time of the accident (or the time it was stolen) and the amount still owed on the loan.
  • Gap insurance is usually much more expensive when purchased from the car dealership compared to purchasing it directly from a major insurance company.
  • Gap insurance makes the most sense for a car owner who has significant negative equity in their car or who has a protracted loan payoff period.

What Gap Insurance Does

When you get into a major wreck, your liability coverage doesn’t pay the cost of a brand-new vehicle. Instead, you’ll get a check for what a comparable car would go for on the used-car market. Insurers call this the vehicle’s actual cash value

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

Gap insurance helps take care of the shortfall. Suppose you bought a $30,000 car and it is stolen two years later. Because depreciation is most severe during those first couple 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 carrier will kick in $3,000 to cover the difference.

Do You Need Gap Insurance?

Gap insurance is a niche product, and some drivers may be able to skip it altogether. If you bought the car with cash, gap insurance is useless. And if you provided a substantial down payment at the dealership, there’s a relatively small chance you will end up upside-down on your loan.

Purchasing gap insurance makes the most sense if:

  • 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.
  • You put down less than 20% when you bought the vehicle.

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

Gap insurance is often built into car leases, so it’s a good idea to check the contract before getting coverage on your own. Otherwise, you may end up paying a premium for protection you already have.

If you've purchased gap insurance, be sure to keep a close eye on your loan balance 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 dealer will try to sell you on their own gap coverage before you drive off the lot. However, they often charge substantially more than major insurance companies, so it pays to be patient and shop around a bit. 

On average, a dealership will charge you a flat rate of $500 to $700 for a policy. By contrast, a major insurer will typically price it at 5% to 6% of your collision and comprehensive premiums. So if you pay $1,000 a year for both those coverage options, you’ll only have to kick in $50 to $60 extra to protect your loan. With savings like this, it pays to shop around for the best car insurance that meets your needs.

One of the other advantages of going with a big-name carrier is you can usually drop the coverage once you start to build equity in the vehicle. It doesn’t hurt to check with the National Automobile Dealers Association (NADA) guides or Kelley Blue Book to get an idea of how much your car is really worth and compare it to your loan balance.

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 if you don't really need it is a good way to save money.