Gap Insurance on a Used Car, Explained

Unless your lender requires you to buy gap insurance for your used car, you don’t have the coverage. Gap insurance is designed specifically to protect drivers who have car loans. If you bought your car with a small down payment or will be paying off your loan for over five years, buying gap insurance for a modest fee might save you thousands.

Gap insurance is specifically intended for drivers with a car loan, covering the “gap” between the car’s actual cash value and the loan balance if the car is stolen or totaled. While your collision and comprehensive insurance might cover the car's current value, they won't cover the remaining loan balance — this is what gap insurance was designed to cover.

Even if it's not required, gap insurance could protect you against large losses. The longer and larger your loan, the greater the risk if your car is lost without gap insurance to cover the gap. Consider gap insurance if you made a small down payment, have a long finance term or your car depreciates fast.

Buying gap insurance doesn't make sense for a car you own outright, becasue there's no loan–ACV gap to cover. Similarly, if your car loan is less than the car's ACV, gap coverage isn't necessary.

Gap insurance covers the difference between your car's actual cash value and your loan balance if the car is totaled or stolen.

You can note the general formula as:

The cost of car insurance on used cars varies whether you acquire it from the dealership or as an add-on from your insurance providers. Nevertheless, used cars are typically one of the cheapest cars to insure. As an add-on to your auto insurance policy, gap insurance may cost you around $40 to $60 annually. But opting to get it from the dealership may cost you hundreds of dollars more.

If your lender doesn't require gap insurance and your loan is less than your car's ACV, adding gap insurance might lead to unnecessarily high insurance costs. Once you've paid off your used car loan or sold the car, you can cancel your gap insurance to receive a refund and reduce car insurance costs.

Many car insurance providers offer gap insurance as an optional add-on to protect your investment in the event your vehicle is totaled or stolen. These insurers, such as Allstate, Nationwide, Progressive and Travelers, each present distinct gap insurance policies, varying in coverage details, eligibility and cost.

For example, Allstate aims to cover the difference between your car's value and the remaining loan balance, whereas Nationwide focuses on cases where a total loss leaves a gap between the actual cash value of the car and your loan amount. Progressive steps in when your loan surpasses your car’s value, and Travelers offers a loan/lease insurance gap option.

Choosing gap insurance is a smart financial decision, but it's important to secure it from established providers known for their reliability and customer service. Make sure to thoroughly compare policies and their benefits to ensure the protection you choose aligns with your needs and budget.

We address common questions about gap insurance on used cars. Whether you're weighing the need for coverage or curious about its benefits, find answers here.