Gap insurance can be incredibly useful because it can potentially save you thousands of dollars. But many people wonder if it’s necessary when you have a used car. After all, used cars are worth less than new cars. Discover when you should get gap insurance for a used vehicle and when you don’t necessarily need it.
In many cases, you can add gap insurance to your standard auto insurance policy. We’ve reviewed the best car insurance companies to discover the best options and to help you decide whether or not you need gap insurance. You can take advantage of our research by using the quote box to get free auto insurance quotes from providers near you. Just enter your zip code to get started.
How Gap Insurance Works
Gap insurance is actually an acronym standing for “guaranteed asset protection.” You can also think of it as the gap between the value of your car and what you still owe.
Gap insurance comes into play if you are in an accident that totals your vehicle. Your insurance company will pay to replace the vehicle, and the amount they offer accounts for your auto’s value before the accident. The problem arises when you owe more on the car than what it is worth.
If the insurance company gives you less for your car than you still owe, then the lender would not receive their full amount from this payment alone. Without gap insurance, you have to pay your lender the difference. If you have gap insurance, the insurance pays for this difference.
Gap insurance can also apply to leasing a car. In that case, it would cover the lease payoff instead of your remaining balance of the loan payments.
The bottom line is that gap insurance is useful when you owe your lender more than the value of your car.
This can happen because of various factors, including interest rates and depreciation. Depending on your interest rate and how new the car is, you may owe more than its value for the first few months or even years of your auto loan.
The other important factor is depreciation. Cars depreciate significantly in their first year. In fact, a new car depreciates about 9% as soon as you drive it off the lot. Within the first year of ownership, it depreciates by about 20%.
To offer an example of how gap insurance works, assume that you buy a new car that costs $25,000. After a bit of time driving the car, you are in an accident, and the car is a total loss. You still owe $19,000 at this point, but your car is only worth $18,000. Your regular auto insurance would pay for $18,000, the value of the car at the time of being totaled. But you would still owe your lender $1,000. Gap insurance covers this, so you don’t have to pay for it out of pocket.
Should You Get Gap Insurance for a Used Vehicle?
Gap insurance is useful for new cars because the depreciation of new vehicles can mean that you owe more than the car is worth – and sometimes by a fair amount.
However, used cars already depreciate in value a fair amount before you buy them. This is especially true if you buy a car that is two or three years old. Depending on the age and value of your car, you likely don’t need to get gap insurance.
To figure out if you need gap insurance on your used car, you will have to consider the vehicle’s value.
Get Gap Insurance for Your Used Vehicle If…
There are typically four main situations when you’d want to get gap insurance for your used vehicle:
- Your car loan is for 60 months (five years) or longer.
- Your vehicle is currently worth less than what you owe on the loan.
- You bought the car when it was under three years old.
- You made a down payment of less than 20% on your loan.
In these situations or any combination of them, you have a much higher risk of your car being worth less than the amount you have left on the loan. This makes it smart to get gap insurance, so you don’t have to pay for the difference yourself.
Don’t Get Gap Insurance for Your Used Vehicle If…
The opposite is also true, meaning you probably don’t want to get gap insurance for a used car if you owe less than the car is worth. Specific situations include:
- Your auto loan is for less than 60 months (five years).
- Your auto is worth more than what you owe on the loan.
- You bought a used car when it was over three years old.
- You made a down payment of at least 20% on your loan.
The bottom line with these situations is that you will owe less than the auto’s actual cash value.
As a note, if you are in an accident and your car is totaled when your car is worth more than the amount you owe, you get to keep the difference. The insurance company will directly pay your lender until they receive all of the money you still owe them. Then, the rest of the money goes to you.
Here’s one example for calculating total insurance coverage: If your car is worth $10,000 and you only owe $1,000 on it, you would receive $9,000 from your insurance company. You could then use this to get your next used car, thinking of it as a car replacement.
Check the Market Value of Your Vehicle
The most important takeaway from what we have already outlined is that you should get gap insurance on your used car if you owe more than the car is worth.
Because of this, the best way to tell if you should get gap insurance is to check the market value of your vehicle. You can estimate your car’s value using Edmunds or Kelley Blue Book, which are both industry standards.
As you look at the value of your car and compare it to what you owe, remember that you don’t always need to get gap insurance if you owe more than the value. It’s smart to do so if there is a large difference, but if the difference is very small and you think you could easily pay it, then you may want to do a cost analysis. Compare how much you would pay for gap insurance to the difference. Gap insurance should not add too much to your auto insurance premium. Because of this, the cost of gap insurance is typically worth it for any difference between the auto’s value and your loan balance.
It’s also worth mentioning that many auto lenders will require you to have gap insurance to ensure they receive the money they are owed, even if the car gets totaled. You may be able to save yourself the effort of checking the value of your car if you know your insurer requires gap insurance.
Where to Get Gap Insurance
There are several options for getting gap insurance, some of which are better than others.
Dealership
The easiest way to get gap insurance is to buy it from the car dealership, but dealership car insurance is always very expensive. It also typically comes in the form of an upfront charge.
When buying a car, expect the dealership to try to sell you gap insurance from them. However, you can save money by getting it from another provider.
Lender
You also typically have the option of getting gap insurance from the bank that issued you the auto loan. This still tends to be more expensive than other options.
Insurance Company
The most affordable method of getting gap insurance is to get it from an auto insurance company.
Expect to pay about $50 to $100 for an entire year of gap insurance. As mentioned earlier, this is not a very large addition to your premiums.
Many insurance providers offer gap insurance, including:
- Nationwide
- Liberty Mutual
- Travelers
- American Family
- Auto-Owners
You can always ask your insurance company if they offer gap insurance when you sign up for your car insurance policy.
Our Recommendations for Auto Insurance
Whether you choose to get gap coverage from the same company that you use for your other insurance policies, looking for the best deals on auto insurance makes sense. After all, saving money on your regular car insurance makes it easier to afford gap insurance.
We suggest you consider USAA, GEICO or Progressive as your auto insurer, as all three companies are known for their excellent customer service and unique benefits. Their discounts often make it easier to afford auto insurance, as well. Don’t forget to use our quote box to compare car insurance quotes easily. This type of comparison tool is the best way to compare free car insurance rates.
USAA: Best Military Provider
USAA earned an overall rating of 9.6 out of 10. This reflects a 9.3 for customer experience and industry reputation, a 10.0 for cost and a 9.5 for coverage.
USAA specializes in military members, veterans and their families. It also offers discounts that make it easier to afford gap insurance, such as for low annual mileage and a family discount.
GEICO: Best Overall
GEICO earned an overall rating of 9.1 out of 10 in our expert analysis. This includes a 9.0 rating for customer experience, a 9.4 for cost, an 8.5 for coverage and a 9.8 for industry reputation.
Although GEICO doesn’t offer gap insurance, its low rates and discounts make it easier to fit that extra coverage from another company into your budget. Drivers may qualify for discounts if they have taken a defensive driving course, just got a new vehicle, have anti-theft or safety features on their car and more.
Progressive: Best for High-Risk Drivers
Progressive earned a 9.1 out of 10 overall. This reflects a 8.9 for customer experience, a 9.3 for cost, a 9.0 for coverage and a 9.1 for industry reputation.As with GEICO, Progressive doesn’t offer gap insurance, but its discounts and competitive pricing help you budget for that extra coverage. There are discounts for teen drivers, drivers looking to add a second car to their insurance and even those just
FAQ: Gap Insurance on Used Vehicles
Is gap insurance necessary on a used car?
You should get gap insurance on a used car if you owe more on your auto loan than the value of your car. It’s not always necessary, but it’s a smart financial decision.
Do you need gap insurance if you have full coverage?
Yes, you should still get gap insurance if you have full coverage. Full coverage auto insurance includes liability coverage, collision insurance and comprehensive insurance. This does not include gap insurance.
Is gap insurance a waste of money?
Gap insurance is not typically a waste of money unless you don’t owe much more on your car than it’s worth. It will give you peace of mind financially as you will not have to worry about paying off the loan on a totaled car if it is more than your car’s actual cash value. This makes gap insurance worth it to most people.
What can I do if I didn’t get gap insurance?
If you didn’t get gap insurance and your car is totaled, you will owe your lender any remaining balance. Your insurance company will directly pay the lender the value of your car. If you still owe money after this, you are legally responsible for it. Your lender will likely require you to pay the full amount, but some may let you use a payment plan.
Methodology
The Detroit Bureau collects data from every major car insurance provider to formulate rankings of the best insurers. Our in-depth rating system takes into account market share, coverage, auto insurance rate estimates generated by Quadrant Information Services, customer satisfaction and ratings from industry experts. Each insurer is given a weighted score in four categories, as well as an overall score out of 10.0.
We recommend auto insurance companies based on these rankings, but we also encourage you to perform your own research and compare quotes to find the best coverage.
