What Is Gap Insurance On Your Car And Why You Need It

by Hank Coleman

What Is Gap Insurance On Your Car And Why You Need It

What Is Gap Insurance On Your Car?What is gap insurance? And, do you need it? Gap insurance is a type of car insurance policy that is designed to cover the gap between what the value of your car actually is, and what you owe on the vehicle, in cases where the vehicle is totaled in an accident. Depending on the type of car insurance you have, the insurance company may not cover the full value of the loan in certain cases. This is where gap insurance comes into play.

How Gap Insurance Works

Gap insurance is designed to help those who put low down payments on a car, or for other reasons, do not have a lot of equity in the vehicle. In cases where the primary car insurance company must pay for the value of the car such as a wreck where the vehicle is totaled, the value paid by the company for the vehicle may not cover the loan amount.

Gap is insurance is designed to fill this gap and sometimes even pay for the deductible required by the insurance company. In fact, some financing companies even require gap coverage if there was a low down payment, to ensure that they will be covered for the loan value.

Where to Get Gap Coverage

There are two main ways that gap coverage is sold. First, it is through your primary car insurance company. Gap insurance sold by your auto insurance company is regulated by the insurance board of your state and has specific requirements about what can and cannot be done. Some car loan companies require gap coverage as part of the agreement to ensure that they will be paid back for the loan amount that they let you borrow.

Ultimate Checklist for Your Finances

Take back control of your finances!

Get a FREE checklist for the money moves to make in the New Year.

Also get new articles, advice, and tips delivered right in your email inbox with our newsletter!

The second way that gap coverage is sold is through the dealer where the vehicle is purchased. Many finance managers try to sell this product when closing a loan at the end of a car sales transaction. This coverage is then financed along with your loan or lease, and all is rolled up into one sales contract. This industry is less regulated that the car insurance industry run by the insurance companies. Gap insurance sold by the car company and their financing arm is more of an “add-on” up sell more than a standard insurance policy.

Do you need gap insurance for your car loan? Maybe you do and maybe you don’t need it. You may be better off simply having a fully funded emergency fund that could pay the difference should the unfortunate incident happen and you total your car while it is upside down financially.

Open a Lending Club IRA and boost your retirement

About Hank Coleman

Hank Coleman is the founder of Money Q&A, an Iraq combat veteran, a Dr. Pepper addict, and a self-proclaimed investing junkie. He has written extensively for many nationally known financial websites and publications. Hank holds a Master’s Degree in Finance and a graduate certificate in personal financial planning. Email him directly at Hank[at]MoneyQandA.com.


Hank Coleman has written 586 articles on Money Q&A. Learn more about Money Q&A on Twitter @MoneyQandA and @HankColeman.


Subscribe To Money Q&A

If you want to learn more about taking back control of your money please subscribe to Money Q&A’s RSS feed or via email to receive all the latest articles! You can also subscribe to our Free Weekly Newsletter.

{ 8 comments… read them below or add one }

Modest Money

I had heard of gap insurance, but never really knew what it was. So thanks for this little lesson Hank. So I guess this would be something you’d want to stop paying for once the amount you owe catches up to the current value of the vehicle. I’m pretty sure I didn’t have to pay for this kind of thing with my last auto loan.

Reply

John @ Married (with Debt)

If one has a nice new vehicle, this is important. I didn’t want to confront an issue where I totaled a car and then had to come up with a few thousand dollars to pay off the loan. Very important.

Reply

Kasi

My husband is a finance manager at a Toyota dealership, so he spends a lot of time explaining what it is, as many people don’t know. Some opt to go for it through the dealership and others don’t

Reply

Jai Catalano

I learned about gap insurance from Judge Judy’s show. Ok I am going to stop there. 🙂

Reply

Processing Gateway

I have not tried this gap insurance. For someone who has really nice car and can afford an additional insurance- then take it! Insurance gives you protection and peace of mind.

One important thing, gap insurance is never part of the requirements to qualify for a car loan. Never believe anyone who tries to sell it like it’s an absolute must. But of course, getting a gap insurance could be the right decision.

Reply

Josh @ Live Well Simply

I’d never heard of gap insurance. Personally I would never finance a car purchase. It doesn’t make good financial sense.

Reply

Tom@BestCarCoverage

Thanks for the nice overview on gap insurance. I think it is a great risk management tool for new car owners. The average new car depreciates 30% the first year and about 50% by the third year, so having gap insurance is a great way to fill the “gap” between the drop in value of your new car and likely higher value of your loan.

Reply

Steve Martin

make sure you check with your insurance company before you sign the papers on a new lease or purchase. My insurance company added gap insurance 100% for a fraction that toyota wanted to charge me..Now it’s turned into a big hassle..

Reply

Leave a Comment


Previous post:

Next post: