Skip to main content

When purchasing a new or used car, one extra level of protection that you might be offered is GAP insurance. And while it might be easy to just brush it off as an unneeded added cost, you might want to think twice about buying it depending on how old the car is and what your loan terms are. Here is why GAP insurance could be worth buying.

What is GAP insurance?

No, it has nothing to do with an aging clothing store that sells clothes that no one wants. GAP insurance is actually more formally known as “Guaranteed Asset Protection.” But its name is more than an acronym, it’s also exactly what it sounds like. GAP insurance covers “the gap” between what your insurance pays out and what the vehicle is worth in the event of a total loss.

For example, if you “total” your car and you still owe $20,000 on it, but your insurance only pays out $18,000 – because that’s the current market value for the car – then you’ll have to pay the extra $2,000 out of pocket. However, if you have GAP insurance, it will cover the difference owed.

Car Salesman
Car Salesman | Susana Gonzalez/Bloomberg via Getty Images

Is GAP insurance worth it?

In a word, yes. But in more words, it can definitely be worth it if you put a small down payment on the loan that you took for either a new or used car. The reason being that it’s likely that if you only put down $1,000 to $2,000 on just about any loan over $10,000, the car you bought is likely depreciating a lot quicker than you’re paying it down.

And if that’s the case, then getting into a “total loss” accident could mean that you won’t be paid out for the amount that you still owe. GAP insurance typically costs anywhere from $200 to $500 from certain lenders, such as credit unions. However, some dealers will try and sell it to you for anywhere between $600 and $800, so be wary of that. Also, most, if not all, new-car leases come automatically with GAP insurance, just be sure to ask your salesperson and find out.

When is GAP insurance not worth it?

If you purchased a new or used car and put down a hefty down payment, you’ll likely owe less than the car is worth while you’re paying off the rest of the loan. According to Esurance, in this case, you don’t need GAP insurance. And this might go without saying, if you plan on paying the car off much earlier than the loan expiration date, then you won’t need GAP insurance

A worker cleans new cars at a dealership lot
A worker cleaning cars at a dealership | ADRIAN DENNIS/AFP via Getty Images

It’s not a substitute for regular insurance

Just remember, GAP insurance is not a replacement or substitute for normal insurance. You need proper insurance to legally drive in just about any state now, so don’t tell us we didn’t warn you. However, the next time you plan to buy a car, just remember to take a look at the extra products that you’re offered. While they might seem like just an extra expense, they could actually be well worth the upfront cost.


5 of the Best Cars to Buy From Hertz Car Sales