What is GAP Coverage and Do You Need It?

It can be challenging to calculate how much of a deductible to take out for both collision coverage and comprehensive coverage when shopping for auto insurance. Your car is likely an essential component of how you live your day-to-day life, helping with your work commute or running errands—on top of being a form of transportation when you need a vacation. All of this makes the decisions you make surrounding your automobile and car insurance particularly emotionally charged. At the same time, expenses with your vehicle can quickly add up if you’re not careful.
Auto insurance has a lot of layers, many of which are only necessary for specific situations. However, if you’re new to shopping for auto insurers or are buying a new car at your car dealership, your dealership may be offering various add-ons to help protect your new vehicle. One such type of additional coverage you may or may not be pitched is something called gap coverage.
When you’re buying a new car and taking out a car loan, gap insurance is generally considered optional coverage. As such, anyone who might be advising you on how to make it out of a car dealership with the lowest monthly payments possible when you’re financing your vehicle will likely steer you clear of adding on gap insurance costs to your overall payment plan. But it doesn’t make complete sense to eschew gap insurance until you understand what gap insurance covers, how gap insurance works, and why gap insurance may be worth including as opposed to other types of warranties your dealership may offer.
Learn more about what gap coverage is, the pros and cons of gap insurance, and where you can get gap coverage in this quick overview on the topic. From there, you should be able to make an informed decision regarding whether or not gap coverage is a good fit for you and your financial situation.

What is gap insurance?

Gap insurance actually stands for “guaranteed asset protection.” While not everyone thinks of a car as an asset in the same way they may think about a home or the stock market, your car can be viewed as a financial asset or a financial liability. To fully understand what “asset protection” means for you and your car, it’s first a good idea to clear up a few facts about your car as an asset in and of itself.
For starters, regardless of how new your vehicle is, most cars depreciate about 20% in the first year alone. Some makes and models even lose a significant portion of their value the second they hit a certain number of miles off the lot. As such, if you’ve taken out a loan and the loan balance is more than the value of your car, you can wind up with negative equity. That can be a problem when you’re leasing a vehicle, but at least at the end of the lease, you have the option of trading in your car and wiping your hands of the negative equity.
On the other hand, things can get stickier when you’re in a car accident and your insurance company deems your vehicle a total loss. In most situations where this happens, the loan term will likely still leave you on the hook for the remaining balance between the actual cash value and the loan amount. If the depreciated value isn’t the same as what your insurer will give you based on your insurance policy, this can be an expense that’s hard to manage. The same can apply if your vehicle is stolen and needs replacing.
This is where gap insurance comes in. While most car insurance companies only cover the depreciated value of your car (such as what you might find on Kelley Blue Book), gap coverage helps you deal with the difference between your vehicle’s market value and what you may still owe on the loan. This allows you to avoid being hit with a large lump sum to your auto lender when you can’t even drive the car anymore. As a result, there are certainly scenarios when it can make sense to get gap coverage in addition to whatever other full coverage you may get from your auto insurance company.

When should you consider getting gap coverage?

Not everyone needs to get gap insurance, but there are certainly some situations where gap coverage is recommended when purchasing a new truck or car. For example, some car dealerships require gap insurance when you lease a car—or at the very least strongly encourage it. Particularly with a leased vehicle, it can make a lot of sense to get gap coverage since your dealership is financing the vehicle for you, and you need to make monthly payments even if the car gets totaled.
Even if you’re not leasing a car and are buying a vehicle instead, there are a few different scenarios where it could be in your best interest to consider getting gap insurance. For example, if you’re taking out an auto loan to finance the purchase of your new car or truck and have a small down payment (say, under 20 percent or so), there can be an imbalance between your car’s market value and the amount you owe on your loan. Another time that it might be a good idea to look into gap insurance is if you’re taking out a loan with a longer-than-normal term length. For example, if your financing terms are longer than 60 months, the car might depreciate a significant amount in that time. As a result, gap coverage can be a worthwhile precaution if you don’t think you’ll be able to pay your car loan down in five years or less.
In some situations, you may have had to roll negative equity into purchasing your new car. In these scenarios, it can also be helpful to gap coverage since your likelihood of owing even more than the car is worth is significantly higher.
It’s also worth noting that some vehicles tend to depreciate faster than others. If you purchase a Toyota, for example, you may wind up finding that your car holds its value much better than other types of vehicles. On the other hand, some vehicles don’t keep value as well — generally, more specialized or niche vehicles. In 2021, BMW, Mercedes, and Volvo were some of the most common brands of the top 10 cars with the fastest depreciation. Vehicles like the Chevrolet Volt and Nissan Leaf also failed to retain much of their value. If you are buying more of a niche car, it makes sense to consider gap insurance coverage since it allows you to protect your purchase.

Companies offering gap insurance

There are two main ways that you can get gap insurance on your car purchase. While your dealership may offer gap coverage when you get a car from them, typically adding gap coverage to your existing auto insurance policy is a much better approach since it generally saves you money.
Here are a few insurers that offer gap insurance in addition to comprehensive and collision coverage:


Allstate is a popular auto insurer that you may already have coverage with, and they’ll happily add gap insurance to your existing auto policy when you purchase your new vehicle. Remember that not all insurance companies will offer gap coverage if you didn’t just buy your car, so make sure to chat with your Allstate agent ahead of purchasing so you know the ins and outs of when to add this type of coverage. In some situations, you may add gap insurance to your car loan in the first year, but this usually depends on the make, model, and year of your vehicle.

State Farm

In addition to offering gap coverage, State Farm also provides something called Payoff Protector. Payoff Protector functions similarly to gap insurance but comes as part of your auto loan if you choose to finance your vehicle purchase through State Farm Bank. According to State Farm’s website, Payoff Protector “may provide you with financial protection if your car is ever totaled or stolen and the insurance settlement amount does not cover the outstanding principal balance due on your loan.”


It’s also possible to get gap coverage through Nationwide. If you already have auto insurance through Nationwide, it makes sense to talk to your agent and get coverage quotes. Generally speaking, most auto insurers have a reasonable price attached to their gap insurance, so it doesn’t make too much sense to shop around for gap coverage if you’re already insured.

Costs and fees

As gap coverage is an optional add-on to your existing insurance coverage, the price may vary based on your auto insurer and what other types of coverage you already have bundled. That being said, according to the Insurance Information Institute, most auto insurers offer a better deal on gap coverage than if you purchase gap insurance through your dealership. As the Insurance Information Institute puts it on their website, “On most auto insurance policies, including gap insurance with collision and comprehensive coverage, adds only about $20 a year to the annual premium.” That means you can get peace of mind about your financed vehicle for less than $2 a month.


  • Protects your ability to pay back your loan. The most significant insurance gap coverage offers you is the assurance that you won’t be on the hook for a massive loan sum on a vehicle you’re no longer able to drive. Primarily if you’ve leased your vehicle or put a small down payment towards financing your new car, this can be a significant saving.
  • Not that expensive. As far as add-ons to your policy go, most auto insurers only ask for an extra $20-$30 annually to have gap coverage as part of your auto insurance policy.
  • It gives peace of mind. Totaling your car or having it stolen can be a major stressor. Just knowing that you have a form of insurance to keep you from dipping into your emergency fund should something terrible happen to your car can be significant.
  • It could be viewed as an unnecessary expense. While there is a purpose to gap coverage, many budget-conscious car buyers view this type of coverage as an unnecessary expense. Especially if you purchase it from your dealership, it could just be another way for them to nickel and dime you.
  • Odds of theft or totaling tend to below. While it depends on where you live and your driving habits, the odds of your car being stolen or you being in an accident where the vehicle is deemed a total loss aren’t super high. As such, you may never need to count on gap insurance anyway.
  • Not crucial for cars that don’t depreciate as quickly. Another reason gap coverage may not be necessary is if you’ve purchased a vehicle that retains its market value better than other cars. Mainly if you’ve purchased certain Toyotas, Hondas, or Dodges, you may not need to worry about the difference between the market value and your loan amount, especially if you make auto loan payments that are higher than your monthly minimum.


Does gap insurance cover your deductible?
No. If your deductible is $750 and your gap coverage settlement is $4000 on a total loss, you’d still be responsible for the deductible, which would make the value of your gap coverage $3250. You must pay your deductible before gap insurance can be applied.
Does gap coverage apply to engine failures or other expensive mechanical problems?
No. Even though mechanical repairs to your engine can be costly, gap insurance is only meant to kick in when an accident causes a total loss, not anything else.
Is negative equity included in gap coverage?
Yes. Another term for the difference between your car’s value and the loan amount you owe on it is negative equity, so that is precisely what gap coverage helps you with.

The bottom line

Ultimately, any personal finance decision you make—especially regarding the types of insurance coverage you get—comes down to personal preference and your overall appetite for risk. For some people, gap insurance is seen as an extraneous expense and a way for insurers or dealerships to get more of their money each month. That being said, gap coverage certainly has a valuable function and can be worth the investment if you don’t have a particularly robust emergency fund.
Gap coverage may not be for everyone, but it’s worth considering. Keep in mind that vehicles are a depreciating asset means that you may be paying more on your loan than the car’s actual market value is at any given point in time. Looking on websites like Kelley Blue Book can help give you an idea of what makes and models depreciate significantly or hold their value over time. This can help you make a more informed decision based on what type of car you’re shopping for and whether or not to include gap coverage on your auto insurance policy. Suppose you’re okay with the idea of gap insurance. In that case, it may make more sense to avoid a car that retains its value, but if you’d rather not take out this kind of insurance coverage, shopping for a vehicle that doesn’t depreciate so quickly might be a smart decision.
Especially when your vehicle is stolen or totaled, it can be a significant financial setback if you still owe money on a car loan and the insurance doesn’t cover the amount owed on the loan. This is because not only are you still on the hook for the negative equity on that loan, but you’ll also need to purchase another vehicle to continue running errands and driving to work. As such, having negative equity can be a significant uphill battle if your finances aren’t in good order, meaning that gap coverage may be worth the small investment with your auto insurer.
Again, whether or not you get gap coverage comes down to your personal needs. While you may be required to get gap insurance if you’re leasing a vehicle, it could be a smart idea to look into gap coverage if you’re financing your car with a small down payment (under 20% down) or have a longer-than-normal loan period. It’s a good idea to take an honest assessment of your risk aversion and driving habits before going to a dealership to buy a car so you won’t be sold something you don’t need. Or so you are ready to purchase gap insurance without having to sit through your dealer’s sales pitch on the product.

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