Is Gap Insurance Worth It?

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Buying a car can be exciting, but also overwhelming. In addition to all the required paperwork, you’ll likely be presented with options for things — like gap insurance — that you’re not sure if you actually need.

Gap insurance is designed to protect you if your vehicle is totaled or stolen before you’ve paid it off. Basically, gap insurance covers the gap between what you owe on your car and its market value at the time of loss.

But money expert Clark Howard warns that gap insurance is, “a solution to a problem that we create for ourselves.”

In this article, you’ll find answers to common questions about gap insurance, including:

What Is Gap Insurance?

Gap insurance is a type of supplemental car insurance that is used to pay the difference between what you owe on your car and what it’s worth at the time of a loss. Also known as guaranteed asset protection, this optional coverage is typically offered to someone who’s about to buy or lease a car.

Consider this real-life example: A while ago, the son of one of our Consumer Action Center members was in an accident. His car at the time was a newly leased vehicle.

“I had a lease on a Genesis and never thought of gap insurance for a lease. The car was totaled and the difference between the buyout and the value was $2,962,” she told us. “Therefore, I had to pay the difference between the value and the buyout.”

Even though her son wasn’t at-fault for the accident, she still had to pay the gap between the vehicle’s worth and the loan balance. But gap insurance would have covered the difference in this situation if her son had a policy.

According to the Insurance Information Institute (III), “On most auto insurance policies, including gap insurance with collision and comprehensive coverage adds only about $20 a year to the annual premium.” But you’ll pay more or less depending on your insurer and whether you get coverage from a lender or dealership.

You can read more about where you can get gap insurance — including Clark’s recommendation when shopping for coverage — here.


How Does Gap Insurance Work?

Buying a car can be an expensive purchase. According to Kelley Blue Book, the average cost of a new car is around $48,008. The average used car costs about $26,213. And data from Statista shows that “most of the new vehicles in the United States in 2023 were acquired using some kind of financing.” The company reports that 79.7% of new car purchases were financed, compared to just 38.36% of used car purchases.

Here’s the problem: Most cars depreciate (or go down in value) the moment you drive out of the lot. So what happens if your loan outlasts your car? Unfortunately, if you’re driving off the lot with a loan — even if your car doesn’t survive until your loan ends — you’re responsible for paying off the full value of the loan.

Imagine this: You finance a new car for $40,000. Unfortunately, one week later, you’re involved in an accident and the car is totaled. You have great standard insurance and expect your insurer to pay the $40,000 loan so you can get another new car. But to your surprise, the insurer will only pay $35,000.

That’s because standard car insurance policies only provide enough protection to cover a car up to its current market value. When you owe more on a car than it’s worth, you’re at risk of being underinsured. This is a situation where gap insurance would kick in.

Where Can You Buy Gap Insurance?

When buying or leasing a new car, the dealership will likely offer you gap insurance. But as a general rule, car dealerships are the worst place to get this coverage. Firstly, there’s a chance they’ll inflate your policy premium. Secondly, they typically roll the cost of coverage into your loan. This means you’ll be paying interest on your insurance. So, where else can you buy gap insurance? Clark explains:

“The lender you’re doing the loan with may offer you gap insurance at a cheaper price than the dealer. Your own automobile insurance may offer you gap insurance at a cheaper price than the dealer. The one place you know you’ll pay the most is if you get it at the dealer.”

Clark recommends that you shop around on your own by contacting third-parties for quotes on gap insurance. A great place to start is with your existing auto insurance company if you have car insurance. If you don’t have auto insurance yet, be sure to ask about gap insurance when shopping for your new car’s coverage. We’ve got guides to help you whether you’re getting car insurance for the first time or shopping around for lower insurance. We also have a list of some of the best auto insurance companies to consider.

Clark Howard’s Thoughts on Gap Insurance

“This is a tough love area because if somebody needs gap insurance, they’re buying a vehicle they shouldn’t be buying with a loan they shouldn’t have,” Clark says.

“The whole purpose of gap insurance is: Somebody’s taking out too long a loan, they’re going to remain upside down on the vehicle — meaning they owe more on the vehicle than what it’s worth — year after year. And then they’re exposed with this gap between the fair market value of the vehicle and what they still owe on the loan.”

But that doesn’t mean that you shouldn’t get gap insurance if you need it.

“If you insist on buying a vehicle that has a payment so high that the only way you can make the payment is to stretch the loan — and you really want to do that — then you do need gap insurance,” he says.

Still, there are other options available. If you haven’t pulled the plug on buying or leasing a vehicle yet, you don’t have to put yourself in the position of needing gap insurance.


“If you stick with a loan that — people think I’m crazy to say — but: You only buy a vehicle that you can afford the monthly payments on [in] 42 months or less. Then you’re never going to get yourself in a position where you need the gap insurance anyway.”

One way to do this is to consider paying cash for a reliable used vehicle. Check out this guide for help deciding whether you should buy a new or used car.

Final Thoughts

Gap insurance is a solution to an unnecessary problem. But if you’re going to buy or lease a vehicle with high monthly payments and a long financing period, then you need gap insurance to protect yourself. That’s because your car will likely depreciate faster than you can pay off your loan. So — in the event of an accident — you need protection for the gap between what you owe on your car and its fair market value.

If you haven’t pulled the plug on buying or leasing a vehicle yet, here are a few things to think about. The III says a few reasons why you might need gap insurance include if you:

  • “Made less than a 20 percent down payment
  • Financed for 60 months or longer
  • Leased the vehicle (carrying gap insurance is generally required for a lease)
  • Purchased a vehicle that depreciates faster than average
  • Rolled over negative equity from an old car loan into the new loan. ”


If you’re set on a car that will require gap insurance, be sure to shop around for the best rate on coverage. This means stay away from what the dealership is offering.

Otherwise, consider buying a used car, saving more for your down payment, and looking at cars that you can afford to pay off in less than four years.