What is gap insurance and how does it work?

Gap insurance is optional auto insurance that allows you to pay off your car loan if your car is total or stolen and you owe more than the depreciated value of the car. Variance insurance can also be described as “covering credit/leasing differences”. This type of coverage is only available if you are the original borrower or lessee of a new vehicle. Gap insurance helps bridge the gap between the loss in value of your car and what you still owe the car.


When you rent or finance a new car, many lenders require that you have comprehensive collision insurance with your auto insurance company until your car is canceled.

Gap insurance must be used in conjunction with a collision or full insurance. If you have a covered claim, your collision or full coverage will help you pay for your stolen or accumulated vehicle to its depreciated value. According to the Insurance Information Institute (III), the value of a new vehicle immediately decreases when you leave it. And the value of most vehicles decreases by about 20% in the first year of possession.

But what if you still owe your loan or lease above the depreciated value of the vehicle? Gap insurance can help you here.


Gap insurance coverage may apply if your car loan is underwater (which means you owe more than the value of the car) if your vehicle is stolen or totaled. “Summed” means that the repair costs exceed the value of the vehicle. Whether a vehicle is declared totally depends on government law and the discretion of your insurer.


Here is an example of how gap insurance can work: Suppose you bought a new car for $25,000. You still owe $20,000 on your car loan if the car adds up in a covered collision. Your collision insurance would cover your lender until the car is fully amortized, say, it’s $ 19,000. If you do not have gap insurance, you will have to pay $1,000 out of your pocket to pay off your entire car loan. If you have gap insurance, your insurer will help you pay the $1,000.

Please note that in the above scenario, auto insurance reimbursement is entirely up to your lender to pay for a car that is no longer manageable. If you think you would need help buying a new car after your car has been calculated in total, consider purchasing a new replacement car cover. Some insurers sell the credit spread/lease and new replacement car coverage as a one-time supplement to an auto insurance policy for a new vehicle.

Can you purchase gap insurance after buying a car?

Depending on the model year of the vehicle, you may be able to purchase variance insurance after purchasing a car. GAP insurance is not only sold at car dealerships – many insurers offer GAP insurance as part of auto insurance. And, according to III, buying gap coverage from an insurance company often costs less than buying from a car dealership.

Some insurers require your vehicle to be new in order to purchase gap insurance. This can mean:

Whether you are the original owner of the vehicle (you have the lease or loan of the original vehicle)

That the vehicle is not more than two or three years old

Ask your insurer about the conditions required to take out gap insurance.


If you wish to take out gap insurance, it is important to note that this type of cover is only available if you rent or finance a new vehicle. Then think about the amount you owe on your car loan versus the value of your car. (You can get an estimate of the value of your car by checking a website like Kelley Blue Book.) Do you owe more than your car is worth? Could you afford to pay the difference from your pocket if your car is in total?