Unless your lender requires you to buy gap insurance for your used car, you don’t have the coverage. Gap insurance is designed specifically to protect drivers who have car loans. If you bought your car with a small down payment or will be paying off your loan for over five years, buying gap insurance for a modest fee might save you thousands.
Gap Insurance on a Used Car, Explained
Updated: May 20, 2024
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Key Takeaways
Gap insurance is designed to cover the “gap” between your loan and your car’s actual cash value in the event of a theft or total loss.
Gap insurance isn’t legally required, but some lenders might require it.
Even if it’s not part of your loan agreement, buying gap insurance can protect you if you have a long-term loan or have a sizable loan relative to your car’s actual cash value.
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Gap Insurance Defined
Gap insurance is specifically intended for drivers with a car loan, covering the “gap” between the car’s actual cash value and the loan balance if the car is stolen or totaled. While your collision and comprehensive insurance might cover the car's current value, they won't cover the remaining loan balance — this is what gap insurance was designed to cover.
WHAT IS YOUR CAR’S ACTUAL CASH VALUE (ACV)?
Actual cash value (ACV) refers to your car's market value, accounting for depreciation up to the point of damage or loss. It’s the basis for insurance payouts on collision or comprehensive claims. If you want to know what the actual cash value of your car is, Kelly Blue Book offers an online ACV calculator.
When to Buy Gap Insurance on a Used Car
Even if it's not required, gap insurance could protect you against large losses. The longer and larger your loan, the greater the risk if your car is lost without gap insurance to cover the gap. Consider gap insurance if you made a small down payment, have a long finance term or your car depreciates fast.
Your lender requires gap insurance
Most lenders insist on collision and comprehensive insurance until your car is fully paid off. Some may also mandate gap insurance, adding an extra layer of protection to cover the difference between your car's value and the loan balance in case of a total loss.
Your down payment is less than 20%
A down payment under 20% keeps your initial loan balance high compared with the car's value, risking negative equity if the car's depreciation outpaces your loan payments.
Your have a longer finance term
Choosing a finance term over 60 months slows down the loan repayment, potentially leading to a scenario where you owe more than the car is worth.
Your car has a high depreciation rate
Driving a car with a high depreciation rate means its value might decrease faster than you're repaying the loan. Gap insurance covers the gap between the loan balance and the depreciated value.
Buying gap insurance doesn't make sense for a car you own outright, becasue there's no loan–ACV gap to cover. Similarly, if your car loan is less than the car's ACV, gap coverage isn't necessary.
CAN YOU GET GAP INSURANCE AFTER YOU BUY A CAR?
You can add gap insurance to your used car insurance policy after buying a used car — just check the cost with your insurer. But if your loan agreement demands gap insurance, make sure you have full coverage with gap insurance from the start.
How Gap Insurance Works on a Used Car
Gap insurance covers the difference between your car's actual cash value and your loan balance if the car is totaled or stolen.
You can note the general formula as:
For example, if you buy a car for $20,000 and it’s valued at $15,000 when lost, with a $1,000 deductible, gap insurance will pay for the $5,000, while your collision or comprehensive coverage will cover the $15,000. Your primary insurance would cover the ACV, leaving you with just the deductible to pay. Without gap insurance, you would have to pay the full amount of your loan even if you no longer have your car.
How Much Gap Insurance Costs on a Used Car
The cost of car insurance on used cars varies whether you acquire it from the dealership or as an add-on from your insurance providers. Nevertheless, used cars are typically one of the cheapest cars to insure. As an add-on to your auto insurance policy, gap insurance may cost you around $40 to $60 annually. But opting to get it from the dealership may cost you hundreds of dollars more.
If your lender doesn't require gap insurance and your loan is less than your car's ACV, adding gap insurance might lead to unnecessarily high insurance costs. Once you've paid off your used car loan or sold the car, you can cancel your gap insurance to receive a refund and reduce car insurance costs.
Companies With Gap Insurance
Many car insurance providers offer gap insurance as an optional add-on to protect your investment in the event your vehicle is totaled or stolen. These insurers, such as Allstate, Nationwide, Progressive and Travelers, each present distinct gap insurance policies, varying in coverage details, eligibility and cost.
For example, Allstate aims to cover the difference between your car's value and the remaining loan balance, whereas Nationwide focuses on cases where a total loss leaves a gap between the actual cash value of the car and your loan amount. Progressive steps in when your loan surpasses your car’s value, and Travelers offers a loan/lease insurance gap option.
Choosing gap insurance is a smart financial decision, but it's important to secure it from established providers known for their reliability and customer service. Make sure to thoroughly compare policies and their benefits to ensure the protection you choose aligns with your needs and budget.
| Allstate | Policy DescriptionAllstate GAP waives the difference between your primary auto insurance settlement and the outstanding balance owed on your vehicle on the date of loss. Allstate GAP may have to be purchased through your lender. |
| Nationwide | Policy DescriptionIf your car is a total loss after an accident, this coverage may pay the difference between the actual cash value and what you owe on the lease or loan. |
| Progressive | Policy DescriptionWhen your loan amount is more than your vehicle is worth, gap insurance coverage pays the difference. |
| Travelers | Policy DescriptionGap insurance, also known as loan/lease insurance, can help protect you if your vehicle is financed or leased. If your vehicle is totaled (deemed a total loss), this coverage may pay the difference between the actual cash value of the vehicle and the unpaid balance of the auto loan or lease. |
FAQ: Gap Insurance on Used Cars
We address common questions about gap insurance on used cars. Whether you're weighing the need for coverage or curious about its benefits, find answers here.
Is gap insurance worth it for a used car?
Gap insurance is worth it if your loan is larger than your car's cash value. It could protect you in case your car is stolen or totaled. However, if your lender requires the coverage, you need to get it.
Do you get gap insurance back if you don’t use it?
Just like with any standard auto insurance, if you paid a lump sum, you can get a refund on the unused period.
What happens to gap insurance when the car is paid off?
Some car insurance companies offer gap insurance refunds if you finish paying off your loan ahead of schedule. But if you pay off your loan on time or your car is totaled or stolen, you likely won’t be eligible for a refund.
Is gap insurance different from car insurance?
Gap insurance is an optional car insurance coverage. To get it, you need to have collision and comprehensive coverage on your policy first.
About Mark Fitzpatrick
Mark Fitzpatrick has analyzed the property and casualty insurance market for over five years, conducting original research and creating personalized content for every kind of buyer. Currently, he leads P&C insurance content production at MoneyGeek. Fitzpatrick has been quoted in several insurance-related publications, including CNBC, NBC News and Mashable.
Fitzpatrick earned a master’s degree in economics and international relations from Johns Hopkins University and a bachelor’s degree from Boston College. He is passionate about using his knowledge of economics and insurance to bring transparency around financial topics and help others feel confident in their money moves.