How Much Is Gap Insurance per Month?

On average, a brand-new car or truck will depreciate by approximately 20% within the first year of ownership. In fact, according to Carfax, many new vehicles will lose up to 10% of their value only in the first month after being driven off the lot. This means that a car is almost never worth what you initially paid for it.

For this reason, many car dealers and auto insurance companies offer gap insurance to protect drivers in the event of a stolen or totaled vehicle. Read on to learn more about what gap insurance covers, where you can purchase it, and specific scenarios that make gap insurance worthwhile.

How does gap insurance work?

Gap insurance — short for guaranteed asset protection insurance — is a type of insurance policy that covers the difference between your car’s actual cash value and the amount you owe on your car loan. This means that if your car is ever stolen or totaled in an accident, your gap insurance will cover the rest of your loan so you don’t need to pay for it out of pocket.

While it may seem only logical that your car’s actual cash value should be at least roughly equivalent to what you still owe on your car loan or lease, the truth is that the difference could be as much as a few thousand dollars. This is particularly true for newer vehicles, which lose their value more quickly than used vehicles. Because of this, gap coverage exists to help bridge that discrepancy.

For example, imagine that two years ago, you bought a new car for $30,000. Today, its actual cash value has decreased to $22,000, but you still owe $24,000 on your auto loan. If around this time, you were to get into a car accident and the car were to be wrecked beyond repair, then if you didn’t have a gap insurance policy, you would need to come up with $2,000 out of pocket to pay off the rest of your car loan.

According to Joyce Ann Gutierrez, Automotive Expert at 4WheelOnline, “If there ever comes a moment when the balance you owe on your car is more than its market worth, you should strongly consider gap insurance. This coverage can be helpful significantly when depreciation drastically reduces the vehicle’s worth. Gap insurance can protect you against financial loss by paying the gap between what you owe and your car’s current worth.”

How much is gap insurance per month?

The monthly cost of gap coverage depends largely on where you buy your insurance, the length of the policy, and the type of car you purchase. The following are the three main ways to go about purchasing gap insurance:

Car insurance companies

Many car insurance companies offer gap insurance as an add-on to your existing car insurance policy. This is usually the cheapest way to shop for gap insurance policies, as it will only add between $20 and $40 a year to your policy premiums. Note that to qualify for a gap insurance add-on, you generally need to have full-coverage insurance (comprehensive and collision coverage).

Not every insurance company offers gap insurance with their auto loans, so you may need to buy a standalone gap insurance policy from another car insurance company. This is usually a more expensive option: separate gap insurance coverage may cost you a one-time fee of between $200 and $500.

Car dealerships

If you choose to finance your car purchase through a car dealership, they will often ask you if you want to purchase gap insurance coverage on top of your auto financing. This is typically your priciest option, with the cost of gap insurance running around $400 to $700 (or more, depending on the car you’re buying).

“While gap insurance from an auto dealership may be convenient, it typically costs much more than gap coverage purchased from other sources. In most cases, you can get the same level of coverage for far less money if you shop around and compare rates at different insurance companies,” says Gutierrez.

Also keep in mind that by adding gap insurance to your car loan, you’ll be increasing the amount on your loan balance, so you’ll essentially be paying interest on your gap coverage premium.

Bank or credit union

In some cases, if you acquire auto financing through your bank or credit union, you may be able to add gap coverage to your car loan balance. Keep in mind that although you’ll likely pay less than you would on an auto loan from a car dealership, you’ll still pay interest on the entire balance, including the additional gap insurance coverage.

When is gap insurance worth the cost?

If you’re not currently financing a car, you obviously don’t need gap insurance. You also probably don’t need gap insurance if you’re financing a used car or if you’ve put down a sizable down payment on a new vehicle. If you’re not sure whether you need the extra coverage, the following are some scenarios in which buying gap insurance can be a smart (or even necessary) move:

You can only afford a small down payment

If you’re financing a brand-new car and are only able to swing a small down payment — i.e., less than 20% of the loan — it may be wise to buy gap insurance. As mentioned previously, depreciation can mean your vehicle’s actual cash value won’t be equal to the amount you owe on your car loan, which could add up to a huge expense in the event of an accident or theft.

You have a lengthy car loan term

You may also want to buy gap insurance coverage if you have a relatively long loan term. While opting for a longer loan term will give you lower monthly payments, it also means that your payments probably aren’t keeping up with the rate of your car’s depreciation, which results in negative equity.

Negative equity on your auto loan means you owe more than the car is worth. This is also known as being “upside down” on your car loan, a situation that makes a strong case to purchase gap coverage.

As Gutierrez explains, “For those who opt for a lengthy payout period and no down payment, gap insurance is crucial. This is because if the car were totaled, the insurance company would only cover the car’s current market value. However, gap insurance can cover the difference if the debtor still owes more than the vehicle is currently worth.”

You don’t have a lot of money saved

If you don’t have the cash on hand to pay off the balance of your car loan or lease in case the vehicle is stolen or totaled, you may want to consider purchasing gap insurance to cover that potential cost. When you consider that buying gap insurance would easily be less expensive than accruing a few thousand dollars of debt on a high-interest credit card, it’s certainly worth adding the extra insurance coverage to your policy.

You’re leasing your vehicle

If you lease a car, oftentimes the lessor will either require you to purchase gap insurance coverage or include it in your lease terms. Of course, even if the lessor doesn’t require you to get gap insurance, you may want to consider adding it on anyway for peace of mind.

You drive a lot of miles

The gap insurance cost can be worth it if you put a lot of miles on your car — for example, if driving is part of your job. An excess of miles on your car causes it to depreciate that much faster, which makes it much easier to significantly widen the gap between your car’s actual cash value and the balance on your car loan or lease.

You drive a vehicle that depreciates quickly

Some vehicles depreciate faster than others, such as certain luxury cars and electric vehicles. If you drive a type of car that loses its value more quickly than others, it can be worth investing in gap insurance, especially if your car insurance coverage wouldn’t be enough to cover the car’s value on top of the amount you owe on your car loan.

If you think you need gap insurance but your car insurance company doesn’t offer gap coverage to add to your existing car insurance policy, you may want to shop around for other auto insurance companies or gap insurance providers. You may be able to get a better deal on the cost of gap insurance plus comprehensive and collision coverage if you switch to a new insurance company.