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What is gap insurance when you buy a car?

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...

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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...

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Reviewed byDaniel Walker
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UPDATED: Mar 19, 2020

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Here's what you should know...
• Gap insurance pays the difference between the current value of your car and your current car loan balance
• Not everyone needs Gap insurance
• Your car insurance company will charge less for Gap insurance than a car dealership
• The cost of Gap insurance is low compared to how much loss you could suffer if your vehicle is totaled

What is gap insurance or gap protection?

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Gap stands for guaranteed auto protection. When you purchase car insurance and pay for collision coverage, you are insuring your vehicle for the actual cash value. Your loan or lease balance may be higher than it is worth. This difference is called the Gap.

You use Gap insurance on new or used vehicles that are you are financing. Gap insurance will pay for the difference between what the car will cost to replace and how much you still owe on the vehicle if your vehicle is a total loss. Car insurance is designed to pay the cost to replace or repair your vehicle when it has been stolen or damaged. Gap insurance helps make sure you can replace your vehicle without having to lose money.

Find the cheapest insurance quotes for your new car when you enter your ZIP into the box above!

What causes a gap in car insurance?

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The simple answer is that a gap occurs when you owe more on the car than it is worth. There are several reasons why you can owe more on your car than it is currently worth, and they include:

• You used a small down payment when you bought the car
• You borrowed more than the purchase price by financing taxes, license, registration, and warranty
• The value of the car has depreciated
• You borrowed money on an extended term basis over a longer number of years
• You included debt you had owed from a vehicle you traded in
• You purchased a car that has rapid depreciation

The value of a new car goes down as soon as you leave the car dealership. Edmonds.com calculates that the average loss in value driving out of the dealership is 11% depending on the type of vehicle you buy. During the first five years, the car will depreciate by 15% to 25% per year from the value the prior year. After five years your car is worth an average of 37% of what you paid for the vehicle when it was new.

Your vehicle may be higher or lower in value depending on the demand for your type of vehicle. If your vehicle is a high demand vehicle, it can sell for a higher price than lower demand vehicles. This difference can mean that your depreciation is a lower percentage on your vehicle. The decreasing value of your car means you can easily owe more on your car loan than the car is worth. That difference is the reason for creating Gap insurance.

Do you need gap insurance?

You do not need Gap insurance if you will never owe more money on your car that it will be worth. Most lenders will not require you to buy Gap insurance, but you need to discuss this with your lender.

To answer this question, you will need to calculate what your car is worth and compare that to the amount you owe on the car. You can do that by using online calculators from websites like:

Edmunds.com
Kelley Blue Book
NADA Guides
TrueCar

Where can I get gap insurance?

Your car insurance company may include Gap insurance with your coverage, but if they do not provide Gap insurance coverage, you can see if you can add the coverage to your current car insurance policy. You can get a premium cost for Gap coverage by asking your agent. You can also ask for Gap insurance coverage when you do comparison car insurance shopping.

Comparing car insurance companies can provide you with the best coverage at a reasonable price. When you comparison shop you need to discuss Gap Insurance with your agent to see if you need the coverage.

How much does gap insurance cost?

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You have two primary options for buying Gap coverage. You can buy it from your car insurance company if they can offer the coverage, or you can but the coverage from the car dealership where you buy your vehicle. Most dealerships will finance the cost of Gap insurance into your payments or lease payments.

Buying Gap insurance from a car dealer may cost you more than through other sources. Whichever source you use to buy Gap insurance, the purpose is to cover you for the full cost of a vehicle for all losses including theft, accidents, or natural disasters.

You may be able to buy Gap insurance from your car insurance company for as little as 4% to 6% of the total premium you pay for your collision and comprehensive coverage. Buying Cap insurance through a car dealer is likely to cost you more than that dollar amount. When you compare car insurance premiums, ask the company to give you the cost for Gap coverage only. That will allow you to compare costs between a car dealership and a car insurance company.

Can I drop gap coverage?

You can cancel the Gap insurance coverage purchased on your vehicle once your vehicle is worth more than you owe on your car loan. You just need to contact your car insurance agent to discuss dropping Gap coverage on your vehicle.

What is not covered by gap insurance?

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Gap insurance does not cover some expenses. Gap insurance does not pay for:

• Interest charged on your loan
• Missed loans payments
• Late fees
• Damage to your vehicle
• Costs related to repossession of your vehicle
• Reduction in value of your car because it had been in an accident
• Extended warranties you have added to your loan

Car insurance is designed to protect you from the cost of damage or a loss. There are times when you owe more on your vehicle than the current value of your car. Those are the times when you need Gap insurance. Gap insurance is usually a lower cost when buying it through an insurance agent, but compare prices when you are shopping for your car insurance.

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