Does gap insurance help you get a new car?

Gap insurance is worth the money whenever you owe more on your car loan or lease than the car is worth. For example, if you paid a small down payment on your car, your loan term is 4-5 years or your car will depreciate quickly, you should consider getting gap insurance. ... read full answer

Gap insurance is never mandated by state law, and few lenders or lessors require it, so the decision to buy it depends on personal circumstances.

Gap Insurance Is Worth It When:

• You don’t have the savings to pay off your loan or lease if the car is totaled or stolen.
• Your down payment is less than 20% of the car’s value.
• Your loan will last four years or more.
• You drive more miles than average, which reduces the car’s value faster.
• Your car is a make and model that depreciates especially fast, like a luxury sedan or electric vehicle.
• You are a single-car household and need a car to get around.
• Your loan includes negative equity from your last car.

Since gap insurance covers the difference between the car’s actual cash value and the amount you owe, researching these two numbers will be a key deciding factor in whether gap insurance is worth it.

Why Getting Gap Insurance Is Worth It

For example, say you buy a car for $20,000 and your down payment is $2,000. This small down payment suggests that gap insurance might be worth it, but it’s still a good idea to check the car’s anticipated value after a year to determine if there will be a gap. If the car is worth $12,000 after a year but you’ll still owe $15,000, gap insurance could be a smart investment. If you don’t buy gap insurance and this car is totaled after a year, you’ll still owe $3,000 even though you can no longer drive it.

On the other hand, if your down payment is large enough or the car’s resale value is high enough that you’ll never owe more than the car is worth, gap insurance is unnecessary. Similarly, if you do owe more than the car is worth but you have the resources to pay the difference if the worst happens, it might be worth taking the risk.

You can get a gap insurance refund for unused premiums if you paid for coverage up front and then canceled it early. If you are cancelling within 30 days after the policy’s start date, you might be able to get a full refund, minus any cancellation fees. In other cases, only a partial refund may be possible. The details will depend on your policy and your state’s laws.... read full answer

When You Can Get a Gap Insurance Refund

• You are paying off, selling, or trading in the covered car.
• You are switching to a different gap insurance company.
• Your loan balance is no longer more than the car’s actual value, though it’s best to leave a cushion of $1,000-$2,000.

If you need a gap insurance refund because you’re selling or trading in the car, be sure to wait until the car no longer legally belongs to you before canceling your gap insurance. Then, you will need to give the appropriate paperwork to your insurance provider, such as proof of sale or auto payoff letter.

Some gap insurance companies might also require an odometer verification showing the mileage on your car, which you can get from a dealership before you sell or trade in the vehicle.

Similarly, if you’re refinancing, wait to cancel your gap insurance until your previous loan is no longer in effect.

When You Cannot Get a Gap Insurance Refund

On the other hand, drivers cannot get a gap insurance refund if the insured car is declared a total loss before the policy’s expiration date. In this case, the gap insurance will pay for the difference between the car’s value and the loan balance, but drivers will not be eligible for a refund for the remaining months of coverage.

How Long Does It Take to Get a Gap Insurance Refund?

Gap insurance refunds usually take 4-6 weeks. Staying in contact with your gap insurance provider and promptly returning signed paperwork can expedite the process, though.

Gap insurance works by covering the difference between the balance on a car loan or lease and what the vehicle is actually worth if it is stolen or declared a total loss. For example, if you owe $24,000 on your loan and your car is worth only $20,000 when it's totaled, gap insurance would cover the $4,000 gap. Purchasing gap coverage ensures that you don't have to make loan or lease payments for a car that is no longer drivable. This type of insurance is optional, unless required by your lender or lessor.... read full answer

In order to purchase gap coverage, a driver typically needs comprehensive and collision insurance, as well. Collision and comprehensive coverage will pay up to the car’s actual cash value (ACV) if it’s a total loss, and then gap insurance pays off whatever you still owe.

Example of How Gap Insurance Works

Imagine you buy a $50,000 car with a down payment of $10,000. One year later, the car is worth $20,000, but you still owe $24,000 on the loan. If the car is totaled in an accident or stolen, your insurance company will pay $20,000 (the car’s actual cash value), minus your deductible.

If you don’t have gap insurance, you’ll still owe $4,000, and you’ll still have to pay off the car even though you can’t drive it. But if you do have gap insurance, it will pay the $4,000, as you can see below.

Other Key Things to Know About Gap Insurance

• Gap insurance can be purchased from dealerships, banks, credit unions and car insurance companies.

• The money received from your gap insurance policy will be paid directly to your lender or lessor, not to you or toward a new vehicle.

• Some gap insurance policies will cover your comprehensive or collision deductible.

• Gap insurance is not legally mandated in any state, but it can be required by lenders and lessors.

• If you sell your car, pay off your loan early, or trade your car in, you can receive a gap insurance refund.

To learn more, check out WalletHub’s guide on gap insurance.