You buy a new car and drive it off the lot. Two months later, it’s totaled in an accident. Your insurance company sends you a check—but it’s thousands less than what you still owe on your loan. Now you’re stuck paying for a car you can’t even drive. That’s the problem GAP insurance solves.
Below, our friends at Warner & Fitzmartin – Personal Injury Lawyers explain GAP insurance.
What GAP insurance covers
GAP stands for Guaranteed Asset Protection. It covers the difference—the “gap”—between what your car is worth when it’s totaled or stolen and what you still owe on your loan or lease.
Your regular auto insurance only pays what your car is worth today, not what you paid for it. According to the Insurance Information Institute, most cars lose 20 percent of their value within the first year. If you’re financing your purchase, you can quickly end up owing more than the car’s worth.
That’s where GAP insurance steps in. It pays the difference between the insurance settlement and your remaining loan balance.
A simple example
Let’s say you financed $28,000 to buy a car. A year later, it’s stolen. Your auto insurance determines the car’s current value is $22,000. That’s what they pay you. But you still owe $25,000 on your loan.
Without GAP insurance, you’d be responsible for that $3,000 difference. You’d be making payments on a car you no longer have.
With GAP insurance, your policy covers that $3,000. Your loan gets paid off, and you can move on.
Who needs GAP insurance
Not everyone needs GAP coverage, but you’re at higher risk if you:
- Made a small down payment. If you put down less than 20 percent, you’re financing most of the purchase price while the car immediately loses value.
- Have a long loan term. According to Experian’s Q2 2025 data, the average auto loan term is 68.9 months for new vehicles. Longer loans mean you’re paying off the principal more slowly.
- Leased your vehicle. Many lease agreements require GAP insurance because you’re responsible for the full value if the car is totaled.
- Traded in a car with negative equity. If you rolled over what you owed from your previous car into your new loan, you started out underwater.
What GAP doesn’t cover
A good car accident lawyer knows that GAP insurance has limits. It won’t pay for:
- Your insurance deductible.
- Late fees or missed payments on your loan.
- Extra charges on a lease for excess wear or mileage.
- Extended warranties or other products rolled into your loan.
GAP only covers the vehicle loan itself—nothing else.
Where to buy it
You can get GAP insurance from three places:
- Your auto insurance company. This is usually the cheapest option. Most insurers add it to your existing policy for around $20 to $60 per year. You can cancel it anytime.
- The car dealership. Dealers typically charge $400 to $700 as a one-time fee that gets added to your loan. You’ll pay interest on that fee for years.
- Your lender. Some lenders offer GAP when you finance. The cost falls somewhere between insurance companies and dealerships.
When you don’t need it anymore
GAP insurance isn’t permanent. Once you’ve paid down enough of your loan that you owe less than your car is worth, you don’t need it anymore. You can check by comparing your current loan balance to your car’s market value. If your loan balance is lower, you can drop the coverage.
The bottom line
GAP insurance is relatively inexpensive protection if you’re financing or leasing a vehicle with a small down payment or long loan term. Cars depreciate quickly, and many drivers find themselves owing more than their vehicles are worth—especially in the first few years.
If your car is totaled during that time, GAP insurance means you won’t be left paying thousands of dollars for a vehicle you can no longer drive.
Disclaimer: This content should not be construed as legal advice.
