What Is GAP Insurance and Do You Need It?

New cars lose value quickly, and car loans are getting longer. Put those together and many drivers owe more on their loan than their car is worth, sometimes for years. If the car is totaled or stolen during that time, regular insurance won't pay off the loan. GAP insurance is designed for that gap.

How GAP insurance works

When your car is totaled or stolen, collision or comprehensive coverage pays its actual cash value, minus your deductible, not what you owe. GAP, short for Guaranteed Asset Protection, is an optional product that covers the difference between your loan balance and that payout.

Illustrative numbers. Some GAP products also cover your deductible; many don't.

When GAP insurance makes sense

GAP is most useful when you are likely to be "underwater" on your loan:

• you made a small down payment, or none,
• your loan term is long, such as six years or more,
• you rolled an old loan balance into the new loan,
• you bought a model that loses value quickly, or
• you are leasing (check first whether your lease already includes it).

It usually isn't worth it if you made a large down payment, have a short loan or already owe less than the car is worth. Once your loan balance drops below the car's value, GAP has nothing left to cover.

Is GAP insurance required?

Generally, no. The Consumer Financial Protection Bureau says you generally can't be required to buy GAP insurance, an extended warranty or credit insurance to get a car loan. If a dealer or lender tells you it is mandatory, ask them to show you where the contract says so. The CFPB adds that if a lender truly requires it, its cost must be included in the finance charge and reflected in the APR.

Where to buy it, and why it matters

The CFPB lists three common sources: the dealership, some direct lenders and your own auto insurance company. Prices vary widely, so compare before you sign.

Canceling and getting a refund

You can usually cancel optional add-ons such as GAP to reduce your costs. If you pay off the loan early, refinance or sell the car, you may be entitled to a refund of the unused portion. The CFPB has taken action against lenders that failed to refund GAP premiums when borrowers were owed money, so check your statement and ask for the refund if you qualify.

Before you buy: a short checklist

1. Compare your loan balance to the car's value today and in a year or two.
2. Ask your auto insurer for a GAP price before you accept the dealer's offer.
3. Read what is excluded, such as deductibles, overdue payments or rolled-over balances.
4. Note when coverage ends. Some products last only a set number of years.
5. Keep the paperwork so you can claim a refund if you pay off early.

GAP works alongside collision and comprehensive coverage, not instead of it. See full coverage vs. liability and the types of car insurance coverage.