Gap Insurance vs Extended Warranty: Which Should You Get?

Purchasing a new or used car is always an exciting time. But once the initial thrill wears off, you’re faced with important choices about additional protection for your vehicle. Two common options are gap insurance and extended warranties. But what’s the difference between these two add-ons? And which one is right for you? Below we’ll compare gap coverage vs extended warranties so you can make the best decision.

What is Gap Insurance?

Gap insurance, also known as guaranteed asset protection or GAP coverage, is a type of car insurance that fills in the “gap” between what your vehicle is worth and what you still owe on your auto loan if your car is totaled or stolen.

For example, say you financed a $20,000 car but still owe $18,000 on the loan. If the vehicle were totaled in an accident shortly after purchase, your standard auto insurance would only pay out the current value of the car, say $15,000. That leaves you with a $3,000 “gap” still owed on the loan.

Gap coverage steps in to pay this difference so you don’t end up making payments on a vehicle you no longer have. It protects you from owing more than the car’s worth if it’s declared a total loss early on when depreciation outpaces the loan balance.

What Does an Extended Warranty Cover?

An extended warranty, also known as a vehicle service contract, covers the cost of mechanical repairs and parts once your original factory warranty expires.

While a factory warranty protects your new car for the first 3 years or 36,000 miles, an extended auto warranty kicks in after that initial coverage period ends. It protects against breakdowns of major systems like the engine, transmission, electronics, steering, brakes, and more.

So if the transmission went out at 40,000 miles for instance, an extended warranty would pay for that expensive repair bill. Extended warranties typically last 1-7 years beyond the factory coverage with various plan terms and options.

Key Differences Between Gap & Extended Warranties

While both provide valuable protection for your vehicle, gap insurance and extended warranties have some important differences:

• What’s Covered: Gap insurance covers the difference between car value and loan balance after a total loss. Extended warranties cover mechanical breakdown repairs after factory warranty expiration.

• Cost: Gap insurance is cheaper, with typical yearly premiums of $200-$600. Extended warranties have higher upfront costs, ranging from $1,000-$4,000 depending on plan terms.

• Length of Coverage: Gap insurance only covers the first 2-3 years of the loan when you’re most upside down. Extended warranties last 1-7 years depending on the contract.

• Situations Covered: Gap insurance only covers total losses from accidents, theft or natural disasters. Extended warranties cover mechanical and electrical repairs from normal wear and tear.

• Refunds: Gap insurance premiums are not refundable if unused. Extended warranties refund any unused portion if cancelled.

Do You Need Gap Insurance?

Gap insurance makes the most sense when:

• You make a low down payment of less than 20%
• You finance for longer terms like 5-7 years
• You drive a new car with rapid depreciation
• You rack up mileage quickly
• Your car doesn’t hold resale value well

Without gap insurance, you run the risk of a total loss early in the loan leaving you still owing thousands. Gap coverage gives peace of mind that you won’t be stuck in this worst-case scenario.

However, gap insurance may not be worth it if you:

• Make a large down payment of 20% or more
• Take out shorter loan terms of 3 years
• Drive an used car that has already depreciated significantly
• Keep mileage low
• Own a car that retains value like a truck or SUV

When the loan balance stays close to the car’s value, gap insurance offers less benefit. Do the math to see if you need it.

Is an Extended Warranty Worth it?

Here are some instances when an extended warranty can be valuable:

• You plan to keep the car beyond 100k miles
• You own a luxury or performance car with expensive parts
• You want a bumper-to-bumper warranty beyond the factory coverage
• You want to protect vulnerable high-tech components
• You need rental reimbursement and roadside assistance

However, extended warranties may not be cost effective if:

• You trade in frequently before warranties expire
• You primarily buy certified pre-owned cars with existing warranties
• You own a very reliable model with low repair frequency
• You can self-insure smaller repair bills

Carefully read the service contract terms to confirm they provide meaningful protection beyond the factory warranty. Also research repair costs on your particular make and model.

Can You Get Both Protections?

Yes, you can and should consider getting both gap insurance AND an extended warranty for your new vehicle purchase or lease!

Gap insurance protects against owing on a totaled car in the first few years. Extended warranties protect against mechanical breakdowns in the mid to long-term life of the car.

While there is some overlap in coverage during years 2-3, they largely cover different risks at different times in your car’s lifespan. Purchasing both together provides more complete protection from unexpected situations.

The combined cost of gap and a longer extended warranty is still affordable, often totaling less than $2,000. That’s a small price to pay for peace of mind driving a major asset like a car. Just be sure to understand what each add-on covers so there are no surprises later.

Where to Buy Gap Insurance and Extended Warranties

You can purchase gap insurance and extended warranties from a few different sources:

Car Dealerships – Most dealers offer both protections at the time of purchasing the vehicle. Make sure to negotiate pricing.

Auto Lenders – Many banks and credit unions that finance cars allow you to add gap insurance to the loan. Ask yours.

Insurance Companies – Insurers like Geico, Progressive, etc. sell bundled gap coverage and extended warranties.

Independent Providers – Companies like CARCHEX and Endurance specialize in extended warranties with various plan options.

Shop around for quotes on both products to find the best coverage and pricing combination for your situation.

The Bottom Line

• Gap insurance ensures you don’t owe on a totaled car by covering the difference between its value and remaining loan balance.

• Extended warranties cover the cost of repairs once factory warranties expire, protecting you from expensive bills.

• Gap insurance makes the most sense for new cars you’ll be upside-down on for the first few years. Extended warranties help once you pass the factory coverage limits.

• Getting both together provides comprehensive protection against different risks for the lifespan of your vehicle.

Carefully consider how gap insurance and extended warranties fit your car’s value, loan terms, mileage plans, and reliability factors. With the right combo chosen, you’ll have peace of mind driving off the lot and for many years to come.