Do you need GAP insurance on a used car?

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Here's what you need to know...
  • GAP Insurance stands for Guaranteed Auto Protection and is designed to offer protection that isn’t normally provided by a standard personal auto insurance policy
  • GAP coverage fills in gaps when a total loss claim is filed and the borrower owes more on the loan than the vehicle is worth
  • Insurance companies only pay for up to the Actual Cash Value of a vehicle when a total loss or theft claim is being settled


Many budget-conscious consumers decide to buy used cars instead of new cars because they can avoid high sticker prices and almost instant depreciation.

As long as you don’t mind taking in a vehicle that’s been driven by someone else and that’s suffered some inevitable wear and tear, there are some undeniable advantages to buying used.

Read this guide to GAP insurance for used cars and you can weigh the pros and cons.

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What is GAP insurance?

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It’s easy to assume that GAP insurance coverage fills in some of the gaps that are present in the standard personal auto insurance policy form.

GAP stands for Guaranteed Auto Protection and is a form of coverage that can be offered through an auto insurance policy or through the loan.

It’s designed to help the vehicle owner or lessee pay off the balance of a loan or lease contract when that balance exceeds the market value.

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The GAP Insurance Trap and How to Spot It

If you’re financing a used vehicle, you’re going to be bombarded with a lot of information all at once.

Not only is the sales person going to attempt to haggle an inflated sales price, they’re going to try to connect you with someone in the finance department who’ll attempt to add all types of protection that’ll increase the dealerships profits and the professional’s commission.

One of these specific added forms of protection that will raise the principal of a loan is GAP.

The question that’s often posed is do you really need it? If you’re leasing, you’re pretty much obligated by your contract to carry continuous GAP cover to fulfill your obligations.

However, if you’re financing, it’s wise to look into the cost before you fall into the trap and raise your loan payment for little to no benefit.

Do you really need GAP insurance coverage?

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GAP coverage is most commonly marketed to new buyers. This is because a new car will drop in value virtually instantly after you sign the bill of sale.

In fact, within the first minute of ownership the car’s value depreciates by 9 percent and within the first year of ownership, the value drops a total of 19 percent.

Since value drops so quickly for new car owners, it only makes sense for these buyers to find a way to fill in the gaps between loan balances and value while they are present.

Here are some scenarios when car buyers need GAP:

  • New car purchase with less than a 20 percent down payment
  • Loan term of 60 months or longer
  • Transferred negative equity from trade to new vehicle loan
  • The vehicle you purchase depreciates at a faster rate because of limited appeal

Scenarios Where Used Car Buyers Need GAP Coverage

At this point, you might think GAP isn’t a cost you’ll take on when you’re buying a used model. While it’s not always an added form of protection that’s marketed to used car buyers, it could still protect your financial situation in some scenarios.

It’s important that you remember that if you’re buying a newer used vehicle, it still depreciates rapidly.

In the second year of ownership alone, a vehicle depreciates 12 percent in value. In the third year, it depreciates another 11 percent.

Depreciation adds up quick if you have a total loss and you don’t have that added layer of protection that fills in the gap.

It’s especially helpful when you have negative equity in your loan, you have a high APR or you don’t make a large down payment.

When to Say No to GAP

If you’re paying cash for the car, you don’t need GAP at all. It’s also fair to say that there’s really no need for GAP if you put down 20 percent because this will cover that gap.

When buying the coverage through a lender, they’ll add between $500 and $700 to your loan and you’ll pay interest on that figure for 48, 60, or even 72 months.

Since this can quickly add up, it might make sense not to have GAP if you could cover the difference between value and what you owe with your own money.

How is vehicle value determined by the insurer?

Before you can weigh the value of a GAP insurance policy, you’ll need to learn how the insurer will value the car in question.

Insurers don’t pay off your loan but they do consider condition, mileage, features, and local sales information to determine actual cash value.

If that number is lower than the loan balance, then your lender will try to collect the difference from you.

This is where GAP would take effect and pay off that balance with some restrictions. Restrictions are what you’ll need to look into as you are comparing your options.

Where can you buy GAP coverage?

There are a few ways you can go about finding GAP protection for your car. If you’re buying a used car and your financing the loan, you can ask the loan processor if they offer any third-party protection that can be paid through the loan.

Another option would be to see if your car qualifies for an endorsement through your insurer, which is usually only available to newer cars with a low amount of mileage.

Before you buy GAP at the dealership, it could benefit you to price the cost for replacement car coverage through an insurer.

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