If you finance a car with little down, gap insurance covers what you’d still owe if it’s totaled or stolen. Buy it from your auto insurer instead of the dealer. It’s usually cheaper there and never collects loan interest, and you can drop it once your balance falls below the car’s value.
Say your $32,000 new car is worth $25,000 a year later, with $29,000 left on the loan. If it’s totaled or stolen then, insurance pays what the car is worth, not what you owe, and the other $4,000 is yours to repay on a car you no longer have.
Dealers typically charge a flat $500 to $700 for gap, according to CarInsurance.com, and fold the fee into your loan. You pay interest on that for the whole term, even in years you no longer need gap.
The Insurance Information Institute says gap is worth considering if you put less than 20% down, finance for at least five years, or buy a model that loses value faster than average. Put 20% or more down on a shorter loan, and you can likely skip it.
Get a gap quote from your insurer before you meet the dealer’s finance manager. Many insurers sell it only to the original owner of a car no more than two or three model years old. Ask about payout limits, too, since Progressive’s version pays no more than 25% of the car’s value, and the cap varies by state. If your insurer doesn’t sell gap (GEICO doesn’t), ask the bank or credit union financing the car for its price, and pay upfront if you can to avoid interest.
At the dealership, decline gap and read the contract before signing, since some dealers add it automatically. If you already bought the dealer’s gap, add coverage to your policy first, then cancel the dealer contract. You’ll usually get back the unused share of the fee, though if it was financed, the refund may go toward your loan.
Insurers won’t always drop gap on their own, so compare your loan payoff with the car’s value at each policy renewal and remove it once you owe less.
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