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Mandy Sleight has over 15 years of insurance knowledge and expertise in auto, home, life, health, pet, supplemental benefits, and other insurance products. She’s a sought-after insurance expert, appearing in Bankrate.com, Moneygeek.com, U.S. News & World Report, Reviews.com, CNET, and other publications, and she's been writing for Compare.com since 2023.
Mandy uses her background and experience working for well-known insurance companies like State Farm and Nationwide Insurance to create engaging and easy-to-understand content that helps readers make smarter insurance choices that have a positive effect on their budgets and finances.
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Lequita Westbrooks is an insurance editor at Compare.com. Her writing and editing experiences span several industries, including insurance, personal finance, higher education, and more. She excels at explaining complex topics like auto insurance in simple, easy-to-understand language and is passionate about helping readers save money. Lequita graduated from the University of South Florida, where she earned her Bachelor’s degree in English.
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If you total your car or someone steals it, you could still owe thousands of dollars on a vehicle you no longer have. Gap insurance helps cover the difference between your car’s value and what you owe.[1] You can get coverage for around $20 to $40 per year through a car insurance company, or up to $700 through a dealership or auto lender.
Let’s take a closer look at gap insurance to learn how it works and where to get it.
Gap insurance only covers the remaining balance of your loan or lease.
Some insurers may only pay up to 25% of your vehicle’s value toward your loan balance.
You can buy gap insurance anytime for a car you finance or lease, then cancel it once your loan balance drops below your car’s value.
Your insurer might declare your vehicle a total loss after a serious accident or theft. If the insurance payout isn’t enough to cover your loan or lease balance, gap insurance can pay the difference.
For example: Let’s say you owe $30,000 on your auto loan, but your car’s actual cash value (ACV) is only $22,000. Without gap coverage, you’d be responsible for the $8,000 difference out of pocket.
Gap insurance covers your outstanding lease or loan balance after a total loss. It doesn’t cover everything that happens to your car.
Here’s what a gap policy doesn’t cover:
Accident damages
Other optional coverages, like extended warranties
Vehicle maintenance
Losses from before you bought the gap policy
Late, missed, or skipped loan or lease payments
Losses from illegal or dishonest acts (like driving under the influence)
Cars used for racing or commercial use
Refinanced loans or leases
Your comprehensive or collision coverage deductible
Insurance payout deductions, like prior damage, custom equipment, salvage value, depreciation, and storage or towing fees
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Gap insurance is usually worth it if you’re financing or leasing a newer car, since most vehicles lose about 20% of their value in the first year.[2] Your auto insurance policy only pays up to the depreciated vehicle value, which could leave you owing more than it’s worth if you total yoru car or someone steals it.
Who gap insurance is for:
Drivers who lease vehicles (usually a requirement)
Owners of cars that depreciate quickly
Drivers with loan terms of 60 months or more
Buyers making a down payment of 20% or less
Anyone rolling over negative equity from a prior loan
Who gap insurance isn’t typically for:
Buyers with positive equity or large down payments
Drivers with little or no outstanding loan balance
Anyone who owns their car outright
Drivers who owe less than the vehicle is worth
Here’s a breakdown of gap insurance costs, payment methods, and pros and cons for each option:
Typical cost: $200–$700
Payment method: Usually paid up front or rolled into your loan
Pros: Convenient to buy and may include benefits like deductible reimbursement
Cons: Often the most expensive option, with limited refund options if you sell or refinance
Typical cost: $200–$700
Payment method: Paid up front or added to your loan
Pros: Can be added later if you still need time to decide
Cons: May not cover interest after the loss date, and refunds are limited with early payoff or refinancing
Typical cost: $20–$40 per year
Payment method: Added to your car insurance premium
Pros: Cheapest and easiest to cancel
Cons: Not all insurers offer it, and it usually requires collision and comprehensive coverage
Adding gap coverage through your insurer is usually the cheapest option. Insurers don’t add interest or dealer markups, and they spread the cost among many drivers. That way, you only pay a small premium rather than a large lump sum.
Several factors affect your gap insurance cost. The biggest one is your vehicle’s value and how quickly it depreciates. Newer cars and models that lose value fast usually cost more to insure.
Your loan-to-value ratio also matters. The smaller your down payment, the larger your potential “gap.”
Other factors include the type of vehicle you’re buying, where you buy your coverage, your claims history, and your state’s regulations. You’ll also usually need full coverage with comprehensive and collision coverage to buy gap insurance.
Consider the following strategies to avoid overpaying for gap insurance.
See if it’s part of your loan. Check your loan or lease agreement to see if it already includes gap insurance.
Consider all of your options. Adding gap coverage to your existing insurance policy is usually the cheapest option, but you could miss out on benefits that a lender or dealer might offer.
Pay for it up front. If you plan to get gap coverage through a dealer or lender, try to pay for it when you purchase your car instead of rolling the cost into your loan to avoid paying interest on the coverage.
Stay on top of your car’s value. Consider canceling gap insurance if your loan balance is less than your car’s market value, so you’re not paying for protection you no longer need.
Shop around to find the best deal. You don’t have to buy gap coverage from the dealer or when you sign your loan paperwork. It’s worth taking the time to shop around and compare quotes from auto lenders, the dealership, and car insurance companies to find the best deal.
You can buy gap insurance from a dealership, bank, credit union, a stand-alone gap company, or your auto insurance company. The following car insurers offer gap insurance:
Some insurers offer loan/lease payoff, which is similar to gap insurance. For example, Progressive may pay up to 25% of your car’s value after a total loss, depending on your state. State Farm doesn’t offer gap insurance, but all State Farm Bank auto loans come with Payoff Protector, which cancels your remaining balance after a total loss insurance claim.
Check quotes from top insurance companies.
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Dealerships usually sell gap waivers, which are contracts rolled into your financing, while auto insurers offer gap coverage as an add-on to your insurance policy. Both protect you from owing more than your car’s worth after it’s totaled, but they work differently in key ways:
Coverage limits: Dealer waivers typically cover the full loan balance. Insurer add-ons may have payout caps, such as 25% of your vehicle’s value.
Policy management: Gap coverage from an insurance company is easy to update and transfer to another vehicle. But you can’t change dealer coverage once you sign for it, and you usually can’t transfer it to another car.
Eligibility: Dealers typically offer gap waivers for all new vehicle purchases and leases, but insurance coverage varies by company.
Claims and payout limits: If you have gap coverage, your insurer handles both claims. The lender or a third-party administrator handles dealer waivers.
Canceling your policy: You can cancel your insurer gap policy at any time. Dealer waivers are harder to cancel, and companies may limit refunds.
Refinancing or selling: Dealer waivers typically end if you refinance or sell. You can cancel gap coverage if you sell your car or keep it if you refinance.
Gap insurance isn’t the only option available to cover your loan balance after a total loss claim. Here are some alternatives to consider:
Loan/lease payoff coverage: Some insurers will provide up to 25% of your car’s ACV after a total loss if you have loan/lease payoff coverage.
New car replacement coverage: Replaces your totaled vehicle with a brand-new version of the same make and model (usually only for cars three years old or newer).
Lender depreciation protection: Some lenders offer depreciation protection to cover the amount your car has depreciated at the time of loss.
Emergency savings: Setting aside money to cover depreciation or pay off your loan early can work as a personal gap cushion.
Gap insurance is only useful while you owe more than your car is worth. It makes sense to cancel when your loan balance drops below your vehicle’s market value, or if you sell or refinance your car.
For example, if your $35,000 SUV loan is now down to $20,000 but the vehicle is worth $24,000, there’s no longer a “gap” to cover.
You also likely won’t need gap coverage if you trade in your car or pay it off early. Before canceling your policy, check your vehicle’s value through Kelley Blue Book or NADA, and review your policy for cancellation instructions and refund eligibility. Keep in mind that companies often prorate or limit refunds, especially for dealer gap waivers.
Follow these steps when you’re ready to cancel gap insurance coverage:
Contact your insurance company. You can usually cancel auto insurance gap coverage by phone, through the insurer’s website, or using the mobile app.
Ask about your refund. Your insurer may refund unused premiums to your original payment method (like your credit card or checking account) or apply the balance as a credit toward future premiums.
Get cancellation confirmation. Request written proof or an email confirming your cancellation so you can track your refund status.
Verify your refund amount. Check your account or statement to confirm you’ve received the refund or policy credit for the correct amount.
If you bought through a dealer or lender, review your contract or contact them directly. Refund rules for gap waivers vary by state. Some base refunds on time left on your loan, while others depend on mileage, loan amount, or vehicle value.
Get real-time quotes to help you save money.
If you’re looking to finance a vehicle, answers to common questions about gap insurance can help you decide if this optional coverage is right for you.
It depends. Gap insurance can be worthwhile if your used car depreciates quickly or you financed most of the purchase price, leaving little or no equity in the vehicle.
No. Gap insurance only applies to a car you finance or lease. If you own your car outright, there’s no loan balance to protect after a total loss.
Yes. You can cancel gap insurance anytime — especially once your car’s value exceeds your loan balance. Most insurers will refund the unused portion of your gap coverage premium.
It depends. Many leases automatically include gap coverage, but not all. Always check your lease agreement before adding separate coverage to avoid paying twice.
Yes. Many gap insurers allow you to add gap coverage after you buy the car, as long as you have comprehensive and collision coverage on your vehicle insurance policy.
Not usually. That said, it depends on the gap insurer and your state. Gap insurance typically only pays the difference between your total loss insurance payout and loan balance, not your deductible or out-of-pocket repair costs.
Yes. If you pay off or sell your car early, you can request a prorated refund for any unused portion of your gap policy or waiver.
Loan/lease payoff coverage is similar but typically caps payouts at around 25% of your car’s value. Gap insurance usually covers the entire remaining loan balance.
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Mandy Sleight has over 15 years of insurance knowledge and expertise in auto, home, life, health, pet, supplemental benefits, and other insurance products. She’s a sought-after insurance expert, appearing in Bankrate.com, Moneygeek.com, U.S. News & World Report, Reviews.com, CNET, and other publications, and she's been writing for Compare.com since 2023.
Mandy uses her background and experience working for well-known insurance companies like State Farm and Nationwide Insurance to create engaging and easy-to-understand content that helps readers make smarter insurance choices that have a positive effect on their budgets and finances.
Lequita Westbrooks is an insurance editor at Compare.com. Her writing and editing experiences span several industries, including insurance, personal finance, higher education, and more. She excels at explaining complex topics like auto insurance in simple, easy-to-understand language and is passionate about helping readers save money. Lequita graduated from the University of South Florida, where she earned her Bachelor’s degree in English.
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