Is GAP Insurance Worth it on a Used Car? What to Consider

When buying a used car, gap insurance may seem like an unnecessary extra cost. But it can actually protect you from major financial losses if your car is totaled or stolen. This guide will explain what gap insurance covers, when it makes sense for a used car, what factors to consider, and if the added cost is worth it.

What Does GAP Insurance Cover?

GAP insurance covers the “gap” between what your car is worth and what you still owe on your loan if the vehicle is totaled or stolen. For example:

• You buy a used car for $15,000
• The car is totaled in an accident after 1 year
• The car’s value has depreciated to $10,000
• But you still owe $12,000 on your loan

Without gap insurance, you’d be stuck owing $2,000 with no car. Gap insurance pays the $2,000 difference so you don’t have to.

When Does GAP Insurance Make Sense for a Used Car?

Gap insurance is worth considering on a used car if:

• You’re financing a significant portion of the purchase price
• You’re putting less than 20% down
• The car depreciates quickly or rapidly loses value
• You plan to own the car long-term with ongoing loan payments

The less equity you have in the car and the faster it drops in value, the higher the risk of ending up “upside down” and owing more than it’s worth. In that scenario gap insurance can protect you.

Factors to Consider for Used Cars

When deciding if gap insurance is worth it on a used car, here are some important factors to consider:

Loan Amount

• The higher the remaining loan amount, the greater the risk of being upside down if the car is totaled

Down Payment

• The lower your down payment, the less equity you build and the more likely you’ll owe more than the car is worth

Depreciation Rate

• Faster depreciation increases the gap between the car’s value and your remaining loan balance

Ownership Plans

• Longer ownership means you’re more likely to be upside down at some point before paying off the loan

Existing Coverage

• If you already have adequate coverage through your auto insurer or credit card, added gap insurance may be unnecessary

Cost

• Gap insurance costs a few hundred dollars upfront. Compare this to the potential thousands it could save you.

When Gap Insurance May Not Be Necessary

Here are some cases where gap insurance is likely not worth the cost for a used vehicle:

• You purchase with cash or pay off the loan quickly
• Your down payment is 20% or more of the purchase price
• You buy a car with slower depreciation like a truck or SUV
• You plan to own the car for just a year or two
• The remaining loan balance will always be very low
• You already have sufficient coverage through your regular auto insurance policy or credit card benefits

What Does Gap Insurance Cost for a Used Car?

Gap insurance costs vary by state, lender, and coverage amount, but typically ranges from $300 to $600 on a used car. It can be purchased upfront or rolled into your loan payments for a few extra dollars per month.

Here are sample costs for a $15,000 used car with a 4-year loan and different down payments:

As you can see, the gap insurance cost is higher when you borrow more for the car since there’s greater financial risk.

Is the Extra Cost Worth the Protection?

Only you can decide if the added expense of gap insurance is worth the peace of mind on a used car based on your specific situation.

If you’re financing most or all of the purchase price, haven’t built up much equity, and are concerned about potentially owing thousands more than the depreciated car is worth, gap insurance can be very worthwhile protection for a few hundred dollars.

But if you’re putting a sizable down payment on a used car that maintains value well, gap insurance is far less beneficial and likely not worth the cost.

Can I Get Gap Insurance on Any Used Car Loan?

Most lenders will allow you to add gap insurance to any auto loan, whether you’re buying new or used. But some luxury or exotic used cars may not be eligible. The lender will let you know if gap insurance can be included in your loan.

You also generally need comprehensive and collision insurance on the car to qualify for gap coverage.

When Should I Buy Gap Insurance on a Used Car?

The best time to purchase gap insurance on a used car is right when you take out the loan. This ensures you’ll have coverage for the full loan term.

Some lenders let you add it on partway through the loan, but this only covers you from that point forward. Gap insurance purchased at the dealership when signing loan papers is easiest and most comprehensive.

Can I Cancel Gap Insurance on a Used Car?

Yes, gap insurance on a used car loan can be canceled at any time. You’ll get back any unused portion of the upfront cost. To cancel, contact your lender that arranged the coverage.

Just be aware that canceling leaves you unprotected against a potential shortfall if your car is totaled.

Is Gap Insurance from the Dealer Worth It?

Dealers often push expensive gap insurance, charging $700 or more. In most cases, you can get coverage just as good directly from your auto insurer or lender for much less.

Dealer gap insurance does offer the convenience of adding it easily to your loan at purchase. But make sure to compare the costs against other options. Many people find they can get sufficient used car gap insurance for hundreds less through other providers.

Can I Get Gap Insurance From My Auto Insurer?

Many top auto insurance companies like Geico, Allstate, and State Farm offer competitively priced gap policies. Rates can be $200 to $600 less expensive than the dealership.

One advantage with auto insurer gap coverage is it’s easy to bundle with your existing policy. Just compare the rate against the lender’s gap insurance option.

Is My Credit Card Gap Insurance Enough?

Some credit cards provide gap insurance as a free benefit when you use the card to finance a car purchase. This can supplement your existing auto insurance and make added gap coverage unnecessary.

But credit card gap protection has limits, like a maximum benefit amount. Compare your card’s coverage against lender/insurer gap policies to determine if you need to purchase additional coverage.

The Bottom Line

Gap insurance can protect you against major financial losses if your used car is totaled or stolen and you owe more than it’s worth. It provides valuable peace of mind.

Carefully consider the loan amount, your down payment and equity, the car’s depreciation rate, and ownership plans when deciding if gap insurance is a smart purchase for your used vehicle.

For many used car buyers who finance a significant portion of the price, the relatively small upfront investment can be well worth it for the financial security gap coverage provides.