Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted on Help Smart Phone and MEL Magazine.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent

UPDATED: Mar 31, 2021

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The lowdown...

  • GAP insurance is an optional type of coverage that can prevent you from having to pay money out of pocket if you are involved in a serious accident and owe more on your car than it is worth.
  • When selling your car, be aware that GAP insurance cannot be transferred to a new buyer.
  • A used car buyer can purchase a new auto insurance policy with GAP coverage.

While some drivers purchase a new vehicle entirely with cash, many use an auto loan to pay for a large portion of the sales price. Some will even finance 95 percent or more of the vehicle’s sales price with a car loan. This is a convenient way to buy a car, but it also may leave you in the position of being upside down with your financing.

Being upside down on a car loan means that you owe more money than your vehicle is worth. This occurs most commonly when a buyer makes a very small down payment on the vehicle and when the vehicle depreciates rapidly. Remember that vehicle depreciation is more significant during the first few years of ownership.

The fact that you are upside down on your car loan is not a concern until you try to sell the car or if you are involved in a car accident. GAP insurance is one way that some drivers overcome the challenges associated with being upside down on a car loan. A closer look at what this coverage is can help you to determine if you should buy it and what your options are if you already have it on your policy.

Learn more about GAP insurance below and make sure to use our free insurance comparison tool above today! 

What is GAP insurance?


Your insurance company will only pay out an amount up to the coverage limit you established when you purchased the policy. More than that, the amount will be limited by the replacement value of your car. Your replacement value is affected by the vehicle’s depreciation since the time of purchase.

Because most vehicle values will depreciate significantly as soon as you drive the vehicle off the lot, you may owe more on your car loan than your vehicle is worth.

If you owe more on your vehicle than it is worth and you are dealing with significant repair issues, you may have to pay money out of your own pocket to repair the vehicle. If you are dealing with a total loss situation on your car, you may need to pay money to pay off the balance on your car loan.

These are not situations that anyone wants to be in. GAP insurance is a special type of auto insurance that is designed to prevent financial loss in these types of scenarios. It essentially pays the difference between the amount you owe on the car and the replacement value of the vehicle.

This additional payment is usually provided directly to your lender to pay off the outstanding loan balance rather than to you as the insured driver.

When should you buy GAP insurance?

There are certain situations when a driver is more likely to be upside down with a car loan, and these are instances when it can be beneficial to purchase GAP insurance. These include:

  • When you make a very low down payment with your purchase
  • When you obtain a long-term auto loan
  • When you buy a vehicle with a fast rate of depreciation
  • When you roll a loss on your previous vehicle into your new car loan

If you can relate to one or more of these factors, it makes sense to purchase GAP insurance with your car coverage.

How is your vehicle’s value determined?

Car adjuster after accident_70080918-1600x1600

Regardless of how old your car is, your insurance company will use the current replacement value when determining the amount of your claim.

This means that the vehicle’s current market value will be taken into account, and this does factor depreciation into the value.

Cars can depreciate very rapidly during their first few years, and this process begins as soon as you drive the vehicle off of the dealership’s lot. Mileage and wear and tear are also used to determine its market value. Some drivers may owe several thousand dollars or more on their car than what the vehicle is worth.

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Is GAP insurance transferable to your vehicle’s buyer?

If you are selling your vehicle to another person, you may be trying to sell the vehicle for an amount higher than the current market value. This is most common when the seller is upside down on financing. GAP insurance is included with your current auto policy, and no portion of your auto policy is transferable. Any new buyer of your vehicle will need to purchase his or her own coverage.

This can also affect you if you are preparing to purchase a used vehicle for a sales price over market value. Remember that most lenders will not issue a used car loan for more than market value on a used car. Therefore, if you are paying more than the market value for a used car, you may be required to make a sizable down payment.

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How can you get a good deal on a new car insurance policy?

Whether you or a new buyer for your current vehicle need to purchase a new auto policy, rest assured that there are some excellent steps that you can take to get a great deal on coverage. Shopping around with at least three or four different providers is the best way to identify the lowest rates for your needs.

However, you should only obtain coverage from a provider that is financially strong and that has a good reputation in the industry.

Adjusting your insurance deductible is another way to get an affordable rate on your coverage. You can easily opt for a higher deductible when requesting your quotes, and this can result in immediate savings on your premium.

How much coverage do you need?

The coverage types and amounts that you select will also play a major role in your cost of insurance. Liability insurance is usually required by law in most areas, and it is one of the more affordable types of coverage you can pay.

Collision and comprehensive insurance are often optional types of coverage, but many drivers prefer to purchase these policies for their added benefits. This is because these types of coverage pay for the driver’s own expenses if he or she needs to file a claim.

Your coverage limits should meet the minimum legal requirements in place as well as any requirements that your lender has. Some drivers prefer to purchase higher coverage limits than what is required by law. Your limits should be reasonable and should ideally help you to avoid paying money out of pocket if you are involved in a serious accident.

How can you save money on car insurance?


There are other great ways to save money on car insurance. For example, there are numerous types of discounts available that you can take advantage of. Discounts, as well as requirements for each discount, vary by provider. These are some of the more common types of discounts available through most providers:

  • Student discounts
  • Safe driver discounts
  • Senior citizen discounts
  • Bundled policies discounts
  • Low mileage discounts
  • Multi-vehicle or multi-driver discounts

Can you get GAP insurance on a used car?

While you or a buyer may be looking for a great rate on coverage for a used car, the coverage should be fully protective. Keep in mind that GAP insurance is available on used cars as well. However, because lenders will not lend more than the value of a used car and because depreciation rates are lower for a used car in most cases, GAP insurance may not be needed or as beneficial for those who are buying a used car.

When you purchase car insurance, you understandably expect it to pay for your vehicle repairs or for a full replacement if you are in an accident. However, if your vehicle has depreciated rapidly and you owe more money on your car loan than what the vehicle is worth, this may not be the case. GAP insurance is available on both new and used vehicles to address this common issue.

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