{"id":11543,"date":"2024-08-30T11:17:33","date_gmt":"2024-08-30T17:17:33","guid":{"rendered":"https:\/\/www.lexingtonlaw.com\/blog\/?p=11543"},"modified":"2025-06-05T15:17:18","modified_gmt":"2025-06-05T21:17:18","slug":"gap-insurance","status":"publish","type":"post","link":"https:\/\/www.lexingtonlaw.com\/blog\/finance\/gap-insurance.html","title":{"rendered":"What is gap insurance?"},"content":{"rendered":"\n
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The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. <\/em>See Lexington Law\u2019s editorial disclosure for more information.<\/em><\/a><\/p>\n\n\n\n

Gap insurance is a type of optional (add-on) car insurance. If purchased, it protects owners against losses that may occur if the compensation from a total loss does not cover the outstanding amount owed on a vehicle\u2019s financing or lease agreement.<\/p>\n\n\n\n

A shiny new car may seem appealing as you drive past the dealership\u2014before the sticker shock and the reality of a new auto loan<\/a> sets in, that is. Even if the initial price isn\u2019t a concern, according to CARFAX<\/a>, the value of a new vehicle can drop by more than 20 percent after the first 12 months of ownership. Everyone\u2019s heard about how much a car depreciates as soon as it\u2019s driven off the lot, but even after those first 12 months, cars lose 10 percent of their value annually for the following four years.<\/p>\n\n\n\n

If you plan to own your vehicle for the long haul, depreciation may not be an issue for you. But if you like to change vehicles relatively often, gap insurance may be something to consider. Gap insurance could save you thousands of dollars if your car is totaled, either from an accident or from theft.<\/p>\n\n\n\n

Gap insurance is a type of optional (add-on) car insurance. If purchased, it protects owners against losses that may occur if the compensation from a total loss doesn\u2019t cover the outstanding amount owed on a vehicle\u2019s financing or lease agreement. If a car is totaled or stolen, gap insurance pays for the difference between the vehicle\u2019s value and the loan or lease balance. Contrary to popular belief, \u201cgap\u201d doesn\u2019t refer to that price disparity. It\u2019s an acronym that stands for \u201cguaranteed asset protection.\u201d<\/p>\n\n\n\n

What does gap insurance cover?<\/h2>\n\n\n\n

In the early years of owning a new car, the loan amount may exceed the vehicle\u2019s market value. Gap insurance covers the difference between what a car is worth at the time of total loss (the depreciated value) and the amount you still owe.<\/p>\n\n\n\n

How gap insurance works<\/h2>\n\n\n\n

Standard auto insurance policies typically only cover the current market value of the vehicle at the time of a claim. Gap insurance is meant to supplement collision or comprehensive coverage.<\/p>\n\n\n\n

Let\u2019s say you bought a brand-new vehicle for $36,000, and a year later, your car is totaled in a covered collision. Assuming you\u2019ve been making your monthly payments, you most likely still owe around $30,000 on your loan. At the same time, as we mentioned, the car\u2019s value may have dropped as much as 20 percent in the first 12 months, making it worth $28,800 at the time of the collision.<\/p>\n\n\n\n

Standard car insurance would pay your lender up to the car\u2019s depreciated value\u2014in this case, only $28,800. That means you must pay $1,200 out of pocket to settle the auto loan. However, if you have gap insurance, your insurer would help pay that $1,200.<\/p>\n\n\n\n

When to get gap insurance<\/h2>\n\n\n\n

You may want to consider buying gap insurance in the following instances:<\/p>\n\n\n\n