Yes, gap insurance can protect you from paying thousands out of pocket if your car is totaled or stolen and you owe more on your loan than the car’s worth. Gap insurance (short for “Guaranteed Asset Protection”) is optional coverage that pays off the difference between your vehicle’s actual cash value (ACV) and the remaining balance on your auto loan or lease in a total loss scenario.
For personalized guidance on gap coverage, contact the Chicago auto insurance experts at Insure on the Spot at 773-202-5060.
What Does Gap Insurance Cover?
Gap insurance covers the remaining loan or lease balance on your vehicle after your standard auto insurance pays out a total loss claim. If your car is stolen or wrecked beyond repair, your collision or comprehensive coverage will provide the actual cash value (ACV) of the vehicle at the time of the loss, minus your deductible.
This ACV is typically much lower than what you owe on your car loan. Gap insurance covers the difference, ensuring you are not left paying off the balance for a car you no longer have.
Example: If you bought a car for $30,000, but a year later it’s worth only $22,000 and you owe $28,000, gap insurance would cover the remaining $6,000 after the insurance payout, leaving you with no further debt on the totaled vehicle.
How Does Gap Insurance Work in Practice?
Gap insurance works alongside your standard auto insurance. After your car is declared a total loss, your insurer will issue a payout based on the car’s depreciated value. If that payout is less than what you owe on the loan or lease, gap insurance steps in to cover the difference.
For example, if your insurer values your car at $15,000 and you owe $20,000, gap insurance would cover the remaining $5,000 owed to your lender, ensuring you don’t have to pay the difference yourself.
Gap insurance does not apply for minor repairs or when the car is not declared a total loss. If your car is damaged but repairable, your collision coverage would cover the cost, and gap insurance wouldn’t be needed.
Do I Need Gap Insurance?
Gap insurance is most beneficial for drivers who have a significant “gap” between their car’s value and what they owe on the loan or lease. You should strongly consider gap coverage if any of the following apply:
- Little or No Down Payment: If you financed a car with less than a 20% down payment, you are likely upside down on your loan immediately after purchase.
- Long-Term or High-Interest Loan: With a loan term longer than 60 months or a high-interest rate, the loan balance decreases slower than the car’s depreciation.
- Rapidly Depreciating or Expensive Vehicle: Certain cars lose value faster than others, such as luxury cars or electric vehicles. If your car is one of these, gap insurance can provide peace of mind.
- Rolled Over Existing Loan Balance: If you traded in a car with an existing loan and added that unpaid amount to your new loan, you are already upside down on your new vehicle, making gap insurance a wise choice.
However, if you made a large down payment, have a short-term loan, or own your car outright, you likely don’t need gap insurance. It’s intended for those who are at risk of owing more than the car is worth in the event of a total loss.
Is Gap Insurance Required by Law or by Lenders?
Gap insurance is not required by Illinois law. The only mandatory auto insurance in Illinois is liability coverage, which covers damage to others. However, many leasing companies require gap insurance as part of the lease agreement to protect their interest in the vehicle.
Some lenders also recommend or offer gap insurance if you have a low down payment or a long-term loan. Always check your loan or lease agreement to see if gap coverage is included or required.
How Much Does Gap Insurance Cost?
Gap insurance is generally affordable. When added to an existing auto insurance policy, it typically costs between $20 to $40 per year. Some insurers offer it as a small monthly addition, around $3–$5 per month.
If purchased through a dealership, gap insurance may cost $500 to $700 upfront, which is often rolled into your car loan. Although convenient, dealer-provided gap insurance is typically more expensive than buying it from your auto insurance provider. Always compare the cost before making a decision.
Where Should I Buy Gap Insurance – From the Dealer or My Insurance Company?
You have several options for buying gap insurance:
- From the Dealer/Finance Office: This is where gap insurance is typically offered when you purchase or lease a car. While convenient, it often comes at a high upfront cost. However, some leasing companies include gap insurance in the lease contract, so check your terms.
- From Your Auto Insurance Company: Most auto insurers offer gap insurance as an add-on to your policy. This is usually much cheaper than buying it through the dealership and can be paid in small monthly premiums. It’s the most cost-effective option for most drivers.
- Standalone Gap Insurance Providers: If your insurer doesn’t offer gap insurance, you can purchase it from standalone providers. These policies can be competitive in price but may not offer the same flexibility as policies from your existing auto insurer.
In almost all cases, purchasing gap insurance through your current insurer is the best choice for cost and convenience.
What Doesn’t Gap Insurance Cover?
Gap insurance is useful but has limitations. It does not cover:
- Your Deductible: You’ll still have to pay your collision or comprehensive deductible. Gap insurance covers only the loan balance after your insurer’s payout.
- Repairs: Gap insurance doesn’t cover repairs to a car that isn’t totaled.
- Medical Bills or Injuries: Gap insurance does not cover injuries or medical costs; that’s what your health insurance or personal injury protection (PIP) is for.
- Non-Total Loss Events: If your car is damaged but not totaled, gap insurance doesn’t apply.
- Mechanical Breakdowns: Gap insurance doesn’t cover the cost of repairs for mechanical issues.
- Tickets, Fees, or Penalties: It doesn’t cover overdue payments or fees on your loan.
How Long Do I Need to Keep Gap Insurance?
You should keep gap insurance until your loan balance is less than the car’s actual value. This typically happens within the first few years of ownership. Once you are no longer “upside down” on your loan, gap insurance is no longer necessary. Many insurers allow you to remove it once it’s no longer needed.
Frequently Asked Questions
Q: What is gap insurance and what does it do?
A: Gap insurance (Guaranteed Asset Protection) is an optional car insurance coverage that pays the difference between your vehicle’s actual cash value and the amount you still owe on your auto loan or lease if the car is totaled or stolen. It essentially protects you from having to pay off a remaining loan for a car you can no longer drive.
Q: How does gap insurance work in a total loss scenario?
A: If your car is declared a total loss, your standard insurance (collision/comprehensive) pays out the car’s depreciated value. If you owe more on the loan than that payout, gap insurance covers the remaining balance owed to the lender. For example, if your insurer pays $15,000 but you owe $20,000, gap insurance would pay the $5,000 gap so your loan is fully paid.
Q: Who needs gap insurance?
A: Drivers who have little equity in their cars benefit most. If you made a small down payment (under ~20%), have a long-term loan (60+ months), leased your vehicle, or rolled over negative equity from a previous car, you’re likely upside down on the loan early on. In these cases, gap insurance is highly recommended.
Q: Is gap insurance required by law?
A: No, gap insurance is not required by state law. It’s an optional coverage. However, leasing companies often require it (and may include it in your lease). A lender financing your car might encourage it but typically doesn’t mandate it like they do liability or collision coverage.
Q: Where can I buy gap insurance?
A: You can get gap insurance either from the car dealership/finance company when you buy or lease the car, or from your auto insurance provider as an add-on to your policy. Buying through your insurance company is usually much cheaper (a small addition to your premium), while the dealer may charge a hefty one-time fee.
Q: How much does gap insurance cost?
A: If added to an auto insurance policy, gap insurance often costs only a few dollars a month (roughly $20–$60 per year, depending on your insurer and car). Dealerships might charge around $500–$700 for a gap insurance plan rolled into your loan.
Q: What does gap insurance not cover?
A: Gap insurance only covers the loan/lease payoff gap in a total loss. It does not cover things like repairs to your car, damage or injuries you cause in an accident, your insurance deductible, or a new vehicle to replace the totaled one.
Q: Can I cancel gap insurance when I pay down my loan?
A: Yes. Once you owe less on the car than it’s worth, you can drop gap insurance. You only need it while there’s a risk of being upside down on the loan. Many people keep gap coverage for the first couple of years of a car loan and cancel it later.
Get a Quote Today!
If you’re unsure whether gap insurance is right for you, call Insure on the Spot at 773-202-5060 for a free quote and personalized advice from our Chicago-based agents. We can help you evaluate your situation and make sure you have the coverage you need to protect your car loan.