Gap insurance is an optional type of car insurance coverage that protects drivers who lease their car or have a loan on their vehicle. It is common for drivers who buy a new car to purchase gap insurance in case their car is stolen or totaled; in fact, it may be required by your lessor or lender.
But do you still need gap insurance if you buy a used car? If you took out a loan to buy a used car, you may still benefit from buying gap coverage, even if it’s not required.
What is gap insurance for a used car?
Gap insurance is a type of coverage that protects drivers who have a loan or a lease on their car. Because the value of a vehicle can depreciate so quickly, you may find yourself with negative equity (which means you owe more than the value of the car) if your car is stolen or totaled while you are paying off your car loan.
Basically, as long as you have full coverage, your car insurance will pay out for a stolen or totaled vehicle — but that payout might not be enough to fully pay off your loan. Gap insurance steps in to pay off the rest, so you can walk away.
While gap coverage is most common with new car purchases, drivers who buy a used car may also need to buy gap insurance. In fact, depending on the terms of your loan, you may be required to purchase gap insurance to protect yourself and your lender in case your vehicle is totaled.
How does gap insurance work for a used car?
Gap insurance works the same way whether you buy a car new or used (and it may be required either way).
With a new car, the value of the car goes down the moment you drive it off the lot. If you took out a loan for the vehicle and it gets totaled or stolen, you will end up owing more than the actual cash value (ACV) of your car, which can leave you in a position where you are stuck making payments for a car you no longer own.
If this happens, gap insurance will pay the difference between what you owe and the value of the car.
But the value of a used car is more stable than a brand new car, which means you won’t lose value immediately after purchasing a used vehicle. The lower purchase price of a used car and the slower depreciation rate mean that gap insurance may not be necessary for a used car.
However, if your down payment was less than 20% of the car's ACV or your loan goes for more than three years (or both!) gap insurance may be a good choice for you. And if your lender requires gap insurance for your used car, then you definitely need it.
Is gap insurance worth it on a used car?
Whether or not gap insurance makes sense when you purchase a used car depends on a number of factors, including:
The age of your car
When you buy a new car it depreciates very quickly, losing a big chunk of its value as soon as you drive it off the lot. But older vehicles depreciate at a much slower rate, which means if you buy a used vehicle that is more than three or four years old, you likely won’t need (and your lienholder probably won’t require) gap insurance.
The length of your loan
The longer your loan, the more likely you are to need gap insurance. This is because a longer loan means smaller payments spread out over a long period of time, which means your car is probably depreciating faster than you are paying off your loan.
Your down payment amount
A small down payment (less than 20% of the value of your vehicle) leaves you more likely to need gap insurance if your car is totaled in an accident. The larger your down payment, the less likely you are to need gap insurance.
What is the most gap insurance will pay for a used car?
The maximum amount gap insurance will pay is determined by your insurance company, and not all companies have the same gap insurance process. For example, Progressive pays a maximum of 25% of your car’s ACV for a gap insurance claim, while Allstate’s Guaranteed Asset Protection coverage (which is its version of gap coverage but is not an insurance product) will waive up to $50,000 of your balance due if you experience a total loss.