What Is Gap Insurance for Cars? How It Protects You from Financial Loss

What is gap insurance for a car? Drivers often ask this question when buying a car, and you'll want to understand this concept before you get insurance. Gap insurance provides extra protection for your vehicle if it's ever stolen or totaled by covering the gap between your car loan and its value.

What Is Gap Insurance for Cars?

What is gap insurance for a new car? Gap insurance is an extra coverage type you can purchase for your vehicle. It stands for guaranteed asset protection. You can add it to your auto insurance policy. Gap insurance is often necessary for car owners with vehicle loans.

The primary purpose of gap coverage is to cover the "gap" between your vehicle loan balance and its actual value if your car is totaled or stolen. Gap coverage is the only insurance coverage that provides compensation for this gap.

When you purchase a new car with a loan, it's not uncommon to owe more money on the vehicle than its current value. In fact, when you leave the dealership with a brand-new car, it may lose up to 20% of its value after you exit the lot. Within the first three years of owning your car, it can lose up to 40% of its value. You might assume your car insurance policy will cover 100% of what you owe if you total the car, but this isn't always true. Insurance companies generally only pay the car’s actual cash value (ACV).

If your car loses 20% of its value after leaving the dealership lot, you might have a gap from the start, leaving you in a financially precarious position if you total the car or someone steals it. With gap insurance coverage, you get the protection you need because the policy covers this difference.

How Gap Insurance Covers the Difference Between Loan and ACV

You must file a claim with your insurance company if someone steals your vehicle or if you are in a car accident. The insurance provider will investigate the situation, examine your car's current value, and review the types of coverage your policy has.

Collision and comprehensive insurance coverages are vital for these situations. Comprehensive coverage covers car theft, while collision covers car accidents.

Once it completes the investigation, the insurance company will do one of two things:

1. Offer enough compensation to repair the vehicle if it can be fixed.
2. Offer your car's ACV if it's deemed totaled.

One thing the insurance company will not do is consider your loan balance. If your car is totaled and its ACV exceeds your loan balance, you'll have enough compensation to repay the loan. You might even have some money left in your pocket. The issue arises when your loan balance exceeds your vehicle's ACV. Let's look at an example.

Suppose you owe $20,000 on your car when you total it. If the auto insurance company determines your car's ACV is $15,000, it will give you $15,000 as your compensation. This money will go directly to the lienholder (your car loan lender), leaving you with a $5,000 balance on the loan. You will be responsible for paying this balance even though you can no longer drive the vehicle.

With a gap insurance policy, the insurance provider would not only pay $15,000 for the car's ACV, but it would also cover the gap of $5,000. The coverage pays off your loan balance, leaving you free and clear of financial responsibility. Through EverQuote, you can request a quote from Progressive Insurance for gap coverage.

When Do You Need Gap Insurance for Your Car?

Gap insurance is helpful for financial purposes in several situations, including the following:

1. You buy a new car with a low down payment. The standard down payment on a new car is 10-20%. If you put this amount or less down, you'll have less equity in your car, putting yourself at a higher risk for a "gap" between your car's loan balance and AVC.
2. You buy a new car with a long-term loan. Because a long-term loan, usually 60 months or more, takes longer to repay, you are more likely to owe more than the car is worth.
3. You lease a car. Most lessors require lease gap coverage on leased vehicles, which adds an extra layer of protection for the lessor.

Buying gap insurance coverage is always helpful when your car value might be less than your car's ACV. You can request an insurance quote through EverQuote from Allstate or Travelers Insurance for your leased vehicle coverage if you want to protect yourself from the risks of a potential gap.

Situations Where Gap Insurance May Not Be Necessary

There are several situations where you might not need gap insurance, including the following:

1. You purchase your car outright. You won't need gap coverage if you don't have a loan.
2. You pay off your car loan. You can cancel your gap insurance coverage once you pay off your car loan.
3. Your car is worth more than your loan balance. If your loan is low compared to the car's ACV, gap coverage isn't necessary.

If you need gap coverage, EverQuote can help you determine if Esurance is the best company for your needs.

How To Purchase Gap Insurance for Your Car

Now that you know what gap insurance coverage is for cars, you might wonder how to buy gap insurance. There are two ways to purchase this type of insurance:

1. Buy it from a car dealership or lender. When you buy a car with a loan, ask the lender or dealership if you can add gap coverage to the deal.
2. Contact an insurance company for a quote. As with any insurance policy purchase, compare your options and quotes before settling on coverage.

The cost of gap insurance varies, but you can compare quotes from Nationwide Insurance, State Farm, and other insurance companies by contacting EverQuote.

Compare Gap Insurance Options With EverQuote

Gap insurance protects you by covering the gap between your loan balance and your car's value. This insurance covers the gap if someone steals your vehicle or you total it. EverQuote provides the best and simplest way to find the best deals on auto insurance. Use EverQuote today to request quotes and find the company with the best coverage for the price.