How Does Gap Insurance Work?

Gap insurance can come to the rescue if your vehicle is totaled or stolen and you owe more on it than it's worth.
Kayda NormanAug 5, 2021

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Key takeaways:

  • Gap insurance pays out when the amount left on your car loan or lease is greater than the value of your vehicle at the time it’s declared a total loss.

  • Gap coverage is worth it only as long as you are leasing a car or if you owe more on a loan than your car is worth.

  • You don’t need gap insurance if you don’t have a car loan or lease.

  • You won’t need gap insurance forever. Drop gap insurance once your car loan is less than the value of your vehicle.


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If your car were totaled or stolen, gap insurance would pay the difference between the value of your car and the balance of your loan or lease, if you have one — gap insurance comes into play only for drivers who do.

Although other insurance will pay for the value of the car at the time of the incident, you’re responsible for paying off your car loan — even if that claim payout isn’t enough to do so.

This is where gap insurance can come in handy.

Gap insurance covers what's owed on a car after a total loss

Gap insurance supplements the payout you get from collision and comprehensive coverage if your car is totaled or stolen. Lenders typically require that you buy collision and comprehensive coverage for the length of your lease or loan, so you’ll typically need both to purchase gap insurance.

Comprehensive and collision insurance pay only what a car is worth at the time of a theft or accident. When you owe more on your car loan or lease than that, gap insurance comes to the rescue.

Although rare, some gap insurance can also cover your comprehensive or collision deductible, the amount subtracted from a claim payout.

Nerdy tip: Drop gap coverage when your car loan is less than the current value of your car. Online pricing guides like Edmunds or Kelley Blue Book can give you an idea of how much your car is worth. Insurers might not drop it automatically, so you may need to remove it.

Here's how gap insurance works:

Let’s say at the time your new car is stolen, it’s worth $25,000 and you have a $30,000 loan. You have comprehensive insurance, which will pay for the value of your car at the time of theft, but you first have to pay a $500 deductible. You receive $24,500 from your insurance company but still owe $5,500 on your loan.

Gap insurance is designed to pay that final $5,500 so you don’t owe money on a totaled car. Without gap insurance, you’ll have to cover the balance on your loan plus the cost of a new vehicle.

Below is that example in a nutshell.

Gap coverage example

Loan left to be paid


Current value of car




Comprehensive insurance pays


Difference between the value of your car (minus deductible) and your loan balance


With gap coverage, driver pays


Without gap coverage, driver pays


Is gap insurance worth it?

A lot of people don’t need gap insurance — if you don’t lease or have a loan, or if your loan is paid down below the value of your car, you don’t need this coverage.

Ultimately, if you do have a lease or newer loan, you want to think about whether you can afford to pay the difference between its balance and the value of your car. If you can’t, or don’t want to deal with that situation in an emergency, you may benefit from gap coverage.

Gap insurance providers

You can generally only buy gap insurance within three years of buying a new car. Although insurers’ guidelines vary, a company may require one or both of the following:

  • Your car is no more than two to three years old.

  • You are the original owner of the vehicle.

Nerdy tip: To avoid paying interest on it, NerdWallet recommends buying gap coverage through your auto insurer rather than from a dealership. Not all car insurance companies provide gap coverage (or an equivalent) or offer it in all states, so you may need to switch companies.

There are three main ways to buy gap insurance:

  • From your auto insurer, as part of your regular insurance payment.

  • From a company that sells gap insurance only. Stand-alone gap insurance is typically sold online through a one-time purchase from a website such as Gap Direct.

  • Through the dealership or lender, rolled into your loan payments. With this arrangement, you’re paying interest on the cost of your gap insurance over the life of the loan, making the coverage far more expensive.

If you buy through your dealership or lender:

  • If you have a car loan, first check your contract to see if you’re required to have gap insurance. Although some lenders may require the coverage, it’s rare. However, your lender will generally require you to buy comprehensive and collision coverage.

  • A dealer may automatically include gap insurance if you lease your car, so make sure to check your lease agreement.

  • If you already bought gap insurance from your dealer and want to buy it from your insurer, you may be able to remove it from your contract. Make sure you have coverage during the transition if you switch providers.

Gap insurance definition

Gap insurance, or guaranteed asset protection, is an optional coverage that pays the difference between what your vehicle is worth and how much you owe on your car at the time it’s stolen or totaled. This coverage supplements a comprehensive or collision payout, which can only be as high as your car’s value.

Insurance companies that sell gap coverage

Some of the largest insurance companies that offer stand-alone gap insurance as add-ons to car insurance policies are:

Other companies may sell gap insurance or a similar policy as part of a loan or lease. For example, if you finance your car directly through the insurer’s bank, you can get gap coverage from State Farm, but not on an auto policy.


See what you could save on car insurance

Easily compare personalized rates to see how much switching car insurance could save you.

Get started on

How much does gap insurance cost?

Auto insurers typically charge a few dollars a month for gap insurance or around $20 a year, according to the Insurance Information Institute. Your cost depends on individual factors like your car’s value. You’ll also need to buy comprehensive and collision coverage. To find the best company for you, compare car insurance rates with at least three insurers.

Lenders charge a flat fee of around $500 to $700 for gap insurance, according to United Policyholders, a nonprofit consumer group, though credit unions may charge less than other lenders.

Remember, if you add the coverage to your loan, you’ll also pay interest on it. The average interest rate for a new car is almost 6%, according to Edmunds. That means you could pay over $800 for three years of gap coverage from a dealer compared with $60 from your auto insurer.

Prices and interest rates will vary, so always check with your dealer and car insurance company to accurately compare costs.

Alternatives to gap insurance

Gap insurance isn’t the only way you can protect yourself if your car is stolen or totaled. Here are other alternatives to consider.

  • Loan/lease payoff: Loan/lease payoff differs from gap insurance in a few key ways, although some insurers use the two terms interchangeably. Gap coverage is available only if you have a new car, but loan/lease payoff may be available for used cars. Additionally, loan/lease payoff pays a set percentage of your car’s value, often around 25%, on top of the claim check instead of your debt balance.

  • New car replacement insurance: If you’re more worried about buying a new vehicle than paying off your old one, new car replacement coverage might be a better choice for you (albeit more expensive). This coverage helps pay for a new car of the same make and model, minus your deductible, to replace your vehicle with a new one.

  • Better car replacement coverage: If you don’t have a new car, you may not be able to buy new car replacement coverage or gap insurance. Your insurer may offer better car replacement to cover your loan balance should worse come to worst.

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