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Should I Buy GAP Insurance?

Written by Zach Shefska

Zach Shefska is Chief Executive Officer of Your Auto Advocate. Zach co-founded Your Auto Advocate in 2019 after convincing his then retired father (sorry, dad) to join him in an attempt to make the car buying process more confidence-inspiring and consumer friendly.

December 28, 2020

If you’ve ever bought a car at a dealership, you’ve probably been offered GAP insurance. It may seem like something you need, but do you really? Is it worth the expense? You’ve probably asked yourself, “Should I buy gap insurance, or should I say no?”

We’ll answer all these questions and more in today’s post. Our goal at Your Auto Advocate is to arm you with the information you need to buy a car. As such, we’ll be taking a deep dive into GAP insurance to explain the ins and outs of this unique type of coverage and best prepare you for when the F&I Manager inevitably brings it up.

What is GAP Insurance?

First things first, GAP is an acronym that stands for Guaranteed Asset Protection. It’s a type of insurance designed for an ultra-specific purpose: if you total your car and you owe more on it than what the insurance company pays out.

That might make sense, but you’re probably still wondering, “should I buy GAP insurance?”

Let’s say you bought a brand-new Honda Civic for $20,000. You financed it and bought GAP insurance. The second you drive off the lot, you’re in a major accident that totals your car. Your insurance company pays you $15,000 for the totaled vehicle, but what about the remaining $5,000 that you owe? That’s where GAP insurance comes in. GAP insurance will cover the $5,000, plus it should (depending on your policy) cover any deductibles involved.

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If you didn’t have GAP insurance, you’d be on the hook for the remaining $5,000. You’d still have to be making monthly payments for a vehicle that you don’t even have anymore.

When Is GAP Insurance Worth It?

GAP insurance is available for both used and new cars. Finance managers will try to sell it on all eligible vehicles. Fortunately, some lenders will directly state if a vehicle is eligible for GAP coverage. This prevents GAP insurance from being sold when it’s absolutely not needed.

You should buy GAP insurance when you don’t have a lot of equity in the vehicle when you drive it off the lot. This situation happens when your trade-in wasn’t worth that much, or you simply didn’t put that much money down. So, if you’re wondering should I buy GAP insurance, you need to look at how much equity you’ve already put into the car.

A general rule of thumb is that you should have GAP coverage if you put less than $5,000 down on the car. Keep this in mind when you’re at the dealership, asking yourself, “should I buy GAP insurance?”

Of course, the above rule is not appropriate in every situation. If you buy a car for $60,000, this rule won’t apply. Why? It’s because the second you drive it off the lot it’s worth 20% less. Your $60,000 car is now worth $48,000. You would need to put $15,000 or more down to avoid needing GAP insurance.

So should you buy GAP Insurance? It ultimately comes down to how much you’re financing compared to how much you put down. If the car is worth $10,000 and you put $5,000 down, you definitely don’t need GAP insurance. If the vehicle is worth $100,000 and you put down $5,000 you should absolutely consider getting GAP Insurance.

Lastly, GAP coverage is included on any lease by default. You don’t need to go shopping for your own GAP insurance if you’re leasing a car. If a dealer ever tries to add GAP coverage to a lease, that’s blatantly unethical.

Will GAP Insurance Increase My Monthly Payment?

The exact cost of GAP insurance varies and depends on where you buy it.Typically, at a dealership, an F&I Manager will take GAP insurance that costs them $250 and try to sell it to you for $980. That’s why you should always negotiate your GAP insurance costs; they’re likely just trying to boost profits. Try to get them down to a price that’s around $500 or lower, or better yet, get a quote from your local bank or auto insurance company. Those policies can run as little as $100 or $200 if purchased from your existing insurance company.

If you buy GAP insurance at the dealership, the cost is added onto the amount that you’re financing. This means that it will boost your monthly payment, but it won’t be by much. If you paid $500 for GAP coverage and spread it out over a five-year loan, you’re looking at an increase of $8.30 per month (recognize this is a sales tactic the F&I Manager will use on you). Of course, the specifics will vary based on what you end up paying for GAP insurance and the length of your loan.

Anyone wondering if they should buy gap insurance should keep in mind that it’s relatively cheap compared to what you could be on the hook for without it. It’s either pay a few hundred dollars throughout the duration of your loan or end up being on the hook for thousands of dollars with no car to show for it. We know what we’d choose.

Should I Ever Cancel GAP Insurance?

GAP insurance is useful, but it’s not needed for the duration of your loan. Once you’re around halfway through the loan, assuming you didn’t pay any extra against the principle, you should cancel the GAP insurance. If you did pay extra against the principle, you should cancel even earlier.

To cancel your GAP insurance, all you need to do is call the dealership and ask for it to be canceled. The prorated amount of what’s left will come off the principle of your loan. This won’t reduce your monthly payment, but it will reduce your total payoff amount.  

When you buy a new car with GAP insurance, set a reminder in your phone to tell you when it’s time to cancel. You might not remember as the years go by, but your phone definitely will.

So, Do I Actually Need GAP Insurance?

Today, we’ve explored the world of GAP insurance and arrived at a single conclusion: not everyone will need GAP insurance, but many will.

If you’re still asking, “should I buy GAP insurance,” take a look at all the numbers involved. It all depends on how much equity you have in the car when you drive off the lot. You’ll need to take a look at your down payment or trade-in value to determine if you need GAP insurance. In many situations, it’s well worth having. However, if you have enough equity in the car when you buy it, you don’t need GAP insurance.

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9 Comments

  1. Dame

    Are there other entities you would suggest buying gap from instead of the dealer?

    Reply
    • Zach Shefska

      Yes! Ask your auto insurance company and local bank or credit union. Their prices will be MUCH lower.

      Reply
  2. Bruce Frink

    You wrote: “Lastly, GAP coverage is included on any lease by default. You don’t need to go shopping for your own GAP insurance if you’re leasing a car. If a dealer ever tries to add GAP coverage to a lease, that’s blatantly unethical.”

    Could you point to any articles you have written or others have written about this exact issue? I leased two cars in California in the last 3 years and the Hyundai dealer (Keyes) agreed with what you wrote. Thank you, Keyes! However, I recently helped my son lease a Tacoma truck from the largest Toyota dealership on the East coast in the DC area and they were aggressively pushing GAP insurance.

    Help!

    Reply
    • Ty

      Aggressively tell them gap should always be included in your lease terms. If they refuse it is. Take your business elsewhere

      Reply
  3. amy

    How do I found out the tax,title.license fees of a 2017 rav4 XLE in Calif before I go into the F I office?

    Reply
  4. Jesse

    Zach, Kimberly said in the video that after the car is half paid off it’s OK to drop the GAP insurance. Can you explain in more detail for a used car. Seems the actual “$ gap” between car NADA worth/Insurance pay off and amount owed on the loan will continue. Example: 13K loan for used car- first years you are only paying off interest not principle. All the time the NADA/Insurance payoff amount (in case of totaled in crash) is decreasing. Seems there will aways be a gap unless I’m not seeing this the right way.

    Reply
  5. Yvette

    I have purchased GAP insurance for two cars and have paid off both loans. Two separate dealers are making up excuses and giving me the run around. Who can I report this to if the dealer refuses to refund my money?

    Reply
    • Zach Shefska

      Make sure the contract has a refund clause in it!

      Reply

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