What is Gap Insurance for Cars and How Does It Work?

But have you ever heard about someone who’s written off a car and their insurance didn’t cover the whole cost? It happens more often than you think. For that reason, insurers offer extra coverage and it’s, of course, at an extra cost. It’s called Gap protection or, more commonly, Gap insurance.

What’s Gap Insurance?

“Gap” in gap insurance is an acronym: Guaranteed Auto Protection. It’s an insurance policy in addition to your usual car insurance that covers negative equity on your vehicle if something happens.

How Does Gap Insurance Work?

Here’s the scenario. You’ve bought a new car and driven it for only a year, more or less. Something happened – an accident or theft, for example – and your car is a total loss. All that’s left to do is settle the claim with your insurance company and buy a different car. However, have you ever wondered how much an insurance pays for a totaled car? Well...

Not so fast, buddy. You financed your car with just a small down payment, and now your loan amount is higher than your car’s pre-accident book value. Your insurance company’s payout is less than what you owe. The result is that you’ve still got car payments on the remaining balance and no car to show for it.  And this isn't including the situation where you totaled a car without collision insurance at all.

Car gap insurance is a policy that wipes away negative equity in this type of situation. On that remaining balance, the gap insurance policy brings your total amount owing to zero.

Usually, a gap insurance refund is issued to you once any liens on your car are satisfied. That check only comes for the balance of the payments you still made while settling your car’s claim.

What Does Gap Insurance Cover?

There are misconceptions about what Gap auto insurance covers. Some people mistakenly purchase gap insurance thinking it’s like an extended warranty. However, it doesn’t cover mechanical failures or repairs, even if the repair costs exceed the vehicle’s value. Nor does Gap insurance cover the negative equity if you sell your car for less than you owe on your loan.

Gap insurance covers the difference between your car’s actual cash value before the total loss and the amount you still owe on the loan at the time of the loss. That’s it.

If you’re at fault for the accident (or whatever the reason for the loss), your deductible still applies. Gap insurance doesn’t cover the deductible situation. Once all is said and done, you might be able to keep your total loss car.

How Much Is Gap Insurance?

Your personal situation dictates how much the gap insurance cost will be. If your vehicle claims history shows that you’re a high risk for your insurer, the cost will be greater than if you’ve never made an insurance claim. You could potentially be refused Gap insurance coverage if your history is all bad. However, you don't want to be in a situation where you crashed your car and have to figure out what you should do with your totaled car.

Is Gap insurance Worth It?

The only situation where gap insurance is beneficial is while your loan amount exceeds its actual cash value. Again, it’s called negative equity. Leases or loans with minimal money down is where it’s important.

For some financing companies, gap insurance is a necessity with little to no money down. You’ll need to pay close attention when you’re making a deal on a vehicle.

Who Offers Gap Insurance?

All major insurers offer gap insurance policies to their customers. Geico gap insurance is a popular product from the little green lizard that saves you 15 percent on your car insurance. State Farm gap insurance is also very common because of their streamlined claims process.

The financing branches for many car manufacturers are getting in on the action as well. For example, Toyota gap insurance is available when you’re financing your vehicle through Toyota Financial Services. Toyota’s policy also covers up to $1,000 of your auto insurance deductible in most areas.

When you’re looking to add gap insurance to your car insurance policy, compare rates. It may be less expensive from one provider, or another may have a higher claim limit. Definitly think about your insurance policies in your decision of selling your totaled car.

Selling a Totaled Car with No Gap Insurance

If you totaled your vehicle, and you don't have gap insurance currently, you might be looking to sell the car to recoup some of the costs. Selling it traditionally to dealers, or junkyards isn't always the best option, and often doesn't give you the real value of the car. Luckily, we have a totaled car value calculator that makes an offer for your vehicle in a couple minutes, and you can have payment in hand in 1-2 days! Click below to see how much your car is worth now.

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