You’re driving off the lot in a new car — but the second you do, its value starts to drop. If you get into an accident or your car gets stolen in the first year or two, your auto insurance might not be enough to cover what you still owe on the loan.
That’s what gap insurance is: It helps cover the “gap” between your car’s actual value and what’s left on your loan or lease.
In some cases, this insurance can be a lifesaver. But in others, it’s an added cost you don’t actually need. Here’s how gap insurance works — and how to tell if it’s right for you.
What is gap insurance?
Gap insurance — also called guaranteed asset protection — is a type of coverage that pays the difference between what your vehicle is worth and what you would owe on your loan if it were totaled or stolen.
Say you owe $25,000 on your loan but your car is worth only $20,000 when it’s declared a total loss. Your regular insurance pays out the car’s current value (so $20,000) — yet that still leaves you $5,000 short. Gap insurance would help cover that difference, so you’re not left making monthly payments on a car you no longer have.
Learn more: 7 surprising situations your standard car insurance won’t cover (and how to stay protected)
When you might need gap insurance
Not everyone needs gap insurance. “Gap insurance is most beneficial for individuals who owe more on their car loan or lease than the vehicle’s actual depreciated value at the time of a total loss,” says Chartered Private Risk and Insurance Advisor Meghan Kelly at Rockland Trust in Hanover, Mass.
This situation is especially common when you:
-
Make a small down payment of less than 20%
-
Choose a long loan term of 60 months or more
-
Buy a car that rapidly loses value
-
Roll negative equity from a previous loan into a new one
-
Lease a car (some leases include gap insurance, but not all)
New cars lose around 30% of their value in the first two years, according to Kelley Blue Book, and continue losing 8% to 12% per year after that. That depreciation creates a coverage gap your regular insurance won’t fill if your financed car is totaled or stolen.
“Without gap coverage, the owner would be responsible for paying the difference between the claim payment and what they owe,” Kelly says. That difference can easily reach several thousand dollars, especially early on.
When gap insurance isn’t worth it
Gap insurance isn’t always necessary. And in some cases, it’s just not worth the cost.
You’re less likely to need it if:
-
You made a large down payment of at least 20%
-
You chose a short loan term of less than 60 months
-
You bought a used car that holds its value well
-
You’ve paid down your loan for a couple of years
-
Your auto loan balance is already lower than the value of your car
-
You paid for your car in full with cash
“Gap insurance generally doesn’t apply to vehicles that are fully owned,” says Kelly.
Not sure where you stand? Look up your car’s current value on a site like Kelley Blue Book or Edmunds, then compare it to what you still owe on your loan. If your loan balance is lower, you probably don’t need gap insurance coverage.
Dealer vs. insurer: Where to buy gap insurance
If you decide to get gap insurance, your next step is choosing where to buy it. In most cases, you’ll have two options: the dealership or auto lender you’re financing through or your auto insurance company. Big-name insurance providers like Allstate, Nationwide and Progressive offer this coverage.
Car dealers often offer gap insurance as part of the financing process. And while it might sound convenient, insurance through a dealership is usually more expensive than buying it on your own. The cost of gap insurance often gets rolled into your auto loan, meaning you pay interest on it too.
“Auto insurers often offer gap coverage at a lower cost than what’s available through dealerships,” says Kelly. So before signing anything at the dealership, ask if gap coverage is already included and whether it can be removed.”
It’s also worth reading the fine print. “You will want to check the details on gap insurance,” says Chad Gammon, a certified financial planner and owner of Custom Fit Financial. “This may not cover extra charges that are not in your loan payment, such as extended warranties.”
Some people accidentally double-up on coverage — once through the dealer and again through their insurer. That’s money wasted. “You would also want to check that you do not have gap insurance for both the dealer and your insurer,” Gammon says.
Before you decide on where to purchase gap insurance for your vehicle:
-
Compare pricing between your dealer and an insurer
-
Ask if it’s refundable — for example, can you cancel it later if you don’t need it?
-
Review what’s covered (and what’s not)
⚠️ Heads-up on debt waiver agreements: Some dealerships sell what they call gap insurance, but it’s actually something called a debt waiver agreement. These agreements don’t offer the same protections as true insurance. They’re often overpriced, can’t be canceled if you pay off your auto loan early and may not refund unused premiums. Ask directly whether it’s insurance or a waiver.
Learn more: 9 age-smart ways to save on car insurance (that can apply to all drivers)
How to know when to cancel your gap coverage
Many people who need gap insurance can cancel it after around two years. The key is that you want to wait until your loan balance drops below your car’s current value.
“If the loan balance is substantially lower than the vehicle’s estimated value, gap insurance likely isn’t necessary,” says Kelly. “Drivers should monitor their vehicle’s actual cash value (ACV) using resources like Kelley Blue Book and compare that to their loan balance.”
The same applies if you refinance into a shorter-term auto loan or buy out a lease. In either case, it’s worth checking in with your insurer to see if the coverage can be removed.
💡 Expert tip: Most auto insurers let you remove gap protection midpolicy without penalty. If you purchased coverage through a dealership, you may be entitled to a partial refund — especially if you paid up front or rolled it into your loan amount.
Learn more: How to switch car insurance companies: 5 simple steps — and why it pays to shop around
How to avoid needing gap insurance in the first place
Gap insurance can be a useful safety net, but the best-case scenario is not needing it at all. And for many drivers, that’s entirely possible with a few smart moves up front.
New cars lose value quickly. By putting more money down, you shrink the gap between what you owe and what the car is worth. Buying used (or gently used) helps too, since the biggest depreciation hit has already happened.
“Keeping mileage low and maintaining the vehicle according to the manufacturer’s recommendations can also help retain its value over time,” says Kelly.
If you’re car shopping now, here are a few ways to stay out of the “gap” danger zone:
-
Make a larger down payment of at least 20%
-
Stick to auto loan terms under 60 months
-
Avoid rolling other debt or extras into your loan
-
Choose cars with strong resale value and reliability — like those from Honda, Subaru and Toyota
Learn more: When’s the best time to shop for car insurance? (It could be right now)
Other stories in our insurance series
-
How to file a car insurance claim: 7 steps to protect yourself (and get the payout you deserve)
-
Credit-based insurance scores: Can your credit score affect your car insurance rates?
-
5 popular car insurance myths: Red cars, age bias and misconceptions that could be costing you
-
Before sharing your car: Does your auto insurance cover guests?
-
How to insure a classic car: Requirements, coverage and comparing your options
FAQ: Saving money when protecting your car
Learn more about gap insurance and other ways to protect your investment with these common questions. And take a look at our growing library of personal finance guides that can help you save money, earn money and grow your wealth.
Does gap insurance cover theft?
Yes. If your car is stolen and your regular insurance deems it a total loss, gap coverage can pay the difference between the payout and what you still owe on your loan or lease.
What are some ways to save money on my auto policy?
Because each insurer uses its own formula to set rates, there’s no better way to find the best deal than by shopping around for a new policy. Other ways to save include taking a defensive driver course, bundling your insurance policies and simply asking about discounts you might be eligible for. You can also enroll in a use-based or telematics program, but you’ll want to weigh privacy against any savings, as these programs are designed to collect data about your driving habits and movements. Learn more in our guide to smart ways to save on car insurance for mature drivers.
Will shopping for insurance quotes hurt my credit score?
No. Insurance companies will conduct a “soft pull” of your credit for quote inquiries, which doesn’t affect your credit score.
Can you get gap insurance on a used car?
Gap coverage is not as common for used vehicles as it is for new vehicles. But gap coverage could be available if you financed a used car and still owe more than it’s worth.
How much does gap insurance cost?
Gap insurance typically costs around $90 per year, according to data from Insure.com. But average rates can vary from as low as $35 in West Virginia to as high as $208 in Montana. As with any insurance, don’t be afraid to shop around for a car insurance policy before you commit.
What are some ways to save money on my auto policy?
Because each insurer uses its own formula to set rates, there’s no better way to find the best deal than by shopping around for a new policy. Other ways to save include taking a defensive driver course, bundling your insurance policies and simply asking about discounts you might be eligible for. You can also enroll in a use-based or telematics program, but you’ll want to weigh privacy against any savings, as these programs are designed to collect data about your driving habits and movements. Learn more in our guide to smart ways to save on car insurance for mature drivers.
Will shopping for insurance quotes hurt my credit score?
No. Insurance companies will conduct a “soft pull” of your credit for quote inquiries, which doesn’t affect your credit score.
Is there ever a time when I can drop full-coverage car insurance?
While full coverage can definitely provide greater financial security and peace of mind for many drivers, there may be situations where it may be costing you more than it’s worth — for instance, if you drive a low-value vehicle or you own your car outright. Learn more about when liability, comprehensive and collision coverage makes sense, and when it might not be the best choice for your needs and budget, in our comprehensive guide to full-coverage car insurance.
Sources
-
Car Depreciation, Kelley Blue Book. Accessed June 3, 2025.
About the writer
Cassidy Horton is a finance writer who specializes in banking, insurance, lending and paying down debt. Her expertise has been featured in NerdWallet, Forbes, MarketWatch, CNN, USA Today, Money, The Balance and Consumer Affairs, among other top financial publications. Cassidy first became interested in personal finance after paying off $18,000 in debt in 10 months of graduation with an MBA. Today, she’s committed to empowering people to stand up and take charge of their financial futures.
Article edited by Kelly Suzan Waggoner
📩 Have thoughts or comments about this story — or ideas on topics you’d like us to cover? Reach out to our team.
