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Drivers who lease or finance their vehicle are typically offered gap insurance. This optional policy helps pay off your remaining loan balance if your car gets totaled or stolen. Gap insurance costs extra, but it provides valuable financial protection.

Most drivers choose to buy gap insurance when they purchase a new vehicle. However, you may be able to buy gap insurance later. You can also get gap insurance on recent model year used vehicles if you don't plan to purchase a brand new car.

KEY TAKEAWAYS
  • Gap insurance policies can be purchased at any point before your car loan is paid off.
  • Many insurers only sell gap insurance for cars that are less than three years old and are under a certain mileage.
  • Gap insurance is available from most car dealerships and auto insurance companies.
  • When shopping for a gap policy, you should use the same gap insurance worth and compare the cost of gap insurance through your dealership and insurance company to see which policy is cheaper.

Should you buy gap insurance?

Gap insurance can come in handy if you’re leasing or financing a new car. During the first few years of your lease or loan, you may negative equity in the vehicle. That means you owe more money on the car than what it's worth.

If your car is totaled or stolen, your auto insurance company compensates you based on the car's actual cash value (ACV). However, you're still responsible for paying off the remaining loan or lease balance. 

Gap insurance covers what you owe, so you aren't reaching into your pocket to cover the difference.

Here's an example:

  • Let's say you purchase a new car that costs $40,000. 
  • Two years into your ownership, your car gets totaled in an accident, and the car insurance company tells you that the car's depreciated value is now $20,000.
  • Let's imagine that you still owe $25,000 on the loan. Without gap insurance, you would have to pay the $5,000 difference personally. But if you had gap coverage, that money would be covered by insurance.

Unlike liability insurance or comprehensive and collision coverage, gap insurance isn't meant for most drivers. Ultimately, the only people who don't need gap insurance are drivers who own their vehicles outright. If you buy gap insurance, however, you can drop the policy once the vehicle's value is greater than your loan balance.

Where can you buy gap insurance?

There are a few different ways to get gap insurance: car dealerships and insurance companies.

"These days, many manufacturers offer gap insurance at the dealership when you buy a vehicle," says David Straughan, senior insurance writer at The Detroit Bureau. "But you can also buy gap insurance from a number of insurance companies. Not all of them offer it as a product, though, so be sure to ask."

How and when you pay for gap insurance depends on how you got coverage:

  • If you purchase gap insurance through a car dealership, it's usually a one-time upfront fee that you pay along with the sales tax, documentation fee, etc. 
  • If you go through your car insurance company, gap insurance is included with your monthly payments.

If you're looking for the cheapest gap insurance, it's a good idea to get a quote from your dealer and your personal insurance company. Keep in mind that the gap insurance cost depends on the amount of money you financed and the value of the vehicle.

When should you buy gap insurance?

Many drivers choose to purchase gap coverage at the start of their car ownership to limit risk when they drive off the lot.

However, Straughan notes that, "You can also purchase gap insurance coverage after the fact. Just be aware that different insurance companies have different rules about when you can do that."

For example, if you purchase a new-to-you used vehicle, some insurance companies only offer gap insurance for recent model years or cars under a certain mileage. According to Straughan, most insurance carriers won't allow you to get gap coverage after a car is two or three years old.

What is the difference between loan/lease payoff coverage and gap coverage?

Loan/lease payoff coverage and gap insurance are the same things. You'll probably find that different insurance companies or car dealerships use these names interchangeably.

While many drivers assume that gap insurance refers to the "gap" between your car loan balance and the value of your car, it's actually an acronym for Guaranteed Asset Protection. Look out for any of these terms when you're shopping for gap insurance.

Frequently Asked Questions

Can I get gap insurance on a used car?

You can typically get gap insurance on a used car, if it's fairly new. Some insurance companies and car dealerships only sell gap insurance for vehicles that are less than three years old or are under a specific mileage. You should check your insurance provider's requirements, as each company has different eligibility criteria.

Can I buy gap insurance after I purchase a car?

Yes, you can get gap insurance after buying a new or leased vehicle. Just remember that there are usually qualifications based on your vehicle's model year and mileage. For example, you can purchase gap insurance on a car that's six months old, but you may not be able to get coverage on a car that's six years old.

Can I get gap insurance after an accident?

It depends. If you get into a minor fender bender and you're within the eligibility time frame, you can probably still get gap insurance. However, you can’t get gap insurance after an accident that totals your vehicle. At that point, you are stuck paying off your auto loan balance out-of-pocket.

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