Whether you buy it new or used, a car is an investment. And it makes sense to protect that investment with the right insurance.
If you’re financing or leasing a new car, you might want to consider gap insurance. What is gap insurance on a car? This type of insurance can help pay off your lease or loan if your car is totaled and you owe more than it’s worth. Here’s what you need to know.
PRO TIP! If you’re curious about other auto insurance options, MoneyLion can help. Search numerous insurers and find savings in seconds at the Auto Insurance Marketplace. Plus get free support with some partners when you make the switch.
Table of contents
What is gap insurance?
If your car is totaled in a covered accident, your collision insurance will pay up to the car’s actual cash value. But if you’re financing a new car or leasing one, you might owe more on the loan or lease than the cash value of the car.
Gap insurance covers the gap between the car’s value and what you owe on your loan or lease. Even if you aren’t a high-risk driver, gap insurance is often great to have.
How does gap insurance work?
Let’s say you just bought a brand-new car for $30,000, and it’s totaled in an accident when you still owe $20,000 on your car loan.
When you file a claim, your collision coverage will pay up to your car’s actual cash value at the time of the crash. New cars depreciate fast, so say your car’s value is $18,000.
The insurance company would pay your lender $18,000. But since you still owe $20,000 on your auto loan, you would need to come up with the remaining $2,000 on your own. However, if you have gap insurance, it would cover that $2,000.
What are the advantages of having gap insurance?
What is gap insurance on a car good for? It can help you in a number of ways.
Protection against financial loss
Depending on how much you still owe on your lease or loan, you might owe your lender thousands of dollars if your car is totaled. If you have gap insurance, you don’t have to worry about the financial strain of a large, unexpected bill.
Pays off the remaining loan balance
If your car is totaled, you’ll probably want to buy a new one. But that can be hard to do when you’re still making payments on the totaled car. Gap insurance can pay off the rest of the loan so that you won’t personally owe the lender.
Provides coverage for depreciation
Most brand-new cars depreciate 20% in the first year. That depreciation may be greater if you rack up more miles than average or if your car has some damage. No matter how much your car depreciates, gap insurance ensures you’ll be able to pay your lease or loan.
More comprehensive coverage than primary auto insurance
Even full coverage car insurance won’t pay the difference between your car’s actual cash value and your loan balance. But when you combine full coverage insurance with gap insurance, you can protect yourself and your car from almost any scenario.
How much does gap insurance cost?
That depends on where you get it. If you buy gap coverage at a dealership, you might be charged a flat rate of a few hundred dollars. However, if you add gap coverage to your existing car insurance, you might pay as little as $5 per month.
Is gap insurance necessary for everyone?
No, it isn’t. If you are financing or leasing a car, it might be helpful. Here are some situations where you may need it:
You made a low down payment
You have a long loan term
The car you’re leasing or financing depreciates especially quickly
If your car was totaled today, could you afford to pay the lender the difference between your car’s cash value and what you owe on the loan? If the answer is no, having gap insurance could be a good idea.
Can you purchase gap insurance at any time?
You can usually buy gap coverage at any point until you pay off your loan or lease. However, some insurance companies have a specific window when you need to purchase coverage.
How to obtain gap insurance
Thinking about gap coverage? Here’s how to get it:
Step 1: Research gap insurance providers
Ideally, give yourself some time for this step. Many different insurance providers offer gap coverage, and your car dealer might, too.
Step 2: Gather the necessary information
Make sure you know the length of your loan term and interest rate. Calculating what you’ll owe on your loan at different points in the future can be useful. You can then compare your car’s estimated (depreciated) value over time and decide whether you need gap coverage for the life of your loan or just for part of it.
Step 3: Compare coverage options and prices
Make sure you fully understand what each provider does and doesn’t cover. Take a close look at pricing, too. Car dealers often charge high prices for the same coverage you’d get with an insurance company.
Step 4: Apply for gap insurance and complete the purchasing process
Once you’ve selected your provider, you’re ready to purchase your gap insurance and enjoy peace of mind.
Is Gap Insurance for You?
If you can’t afford to pay the difference between your car’s value and what you owe on your car loan or lease, gap insurance can be a smart investment. It’s especially wise if you made a small down payment or have a long loan term.
Want to learn more about car insurance and empower your financial health? MoneyLion can help!
Search hundreds of insurers to find savings in seconds at the Auto Insurance Marketplace.
FAQs
Can I cancel gap insurance if I no longer need it?
You can usually cancel at any time. However, if you’re leasing a car, the leasing company might require gap coverage.
Can I transfer gap insurance to a new vehicle?
Gap insurance is usually non-transferrable, but you can check with your insurance company to make sure.
Is gap insurance the same as extended warranties?
No — extended warranties generally protect you from repair costs. What is gap insurance on a car for? It covers you if you owe the lender more than your car’s cash value if the car is totaled.
You may like
Community Posts
Similar Posts
Disclosures
This material is for informational purposes only and should not be construed as financial, legal, or tax advice. You should consult your own financial, legal, and tax advisors before engaging in any transaction. Information, including hypothetical projections of finances, may not take into account taxes, commissions, or other factors which may significantly affect potential outcomes. This material should not be considered an offer or recommendation to buy or sell a security. While information and sources are believed to be accurate, MoneyLion does not guarantee the accuracy or completeness of any information or source provided herein and is under no obligation to update this information. For more information about MoneyLion, please visit https://www.moneylion.com/terms-and-conditions/.
MoneyLion does not provide, own, control or guarantee third-party products or services accessible through its Marketplace (collectively, “Third-Party Products”). The Third-Party Products are owned, controlled or made available by third parties (the "Third-Party Providers"). Should you choose to purchase any Third-Party Products, the Third-Party Providers’ terms and privacy policies apply to your purchase, so you must agree to and understand those terms. The display on the MoneyLion website, app, or platform of any of a Third-Party Product or Third-Party Provider does not-in any way-imply, suggest, or constitute a recommendation by MoneyLion of that Third-Party Product or Third-Party Financial Provider. MoneyLion may receive compensation from third parties for referring you to the third party, their products or to their website.
MoneyLion is not a licensed insurance provider and does not engage in the “selling”, “solicitation,” or “negotiating” of insurance within the meaning of applicable state law. All insurance quotes, products and/or policies are offered through third-party affiliates that are licensed insurance brokers and/or providers.