While it may sound like a well-fitting pair of chinos, gap coverage is a type of auto insurance that covers the “gap” between standard car insurance and what a person owes on their auto loan. (It’s what is known as your coverage gap.)

With new cars depreciating by an average of 11% as soon as you drive them off the lot and then by about 20% per year for the first five years, gap insurance can help if you’re financing a newer vehicle for yourself or your small business.1 Learn more about how gap coverage works, how much it costs, and where you can get it.

What is gap insurance?

If your vehicle is totaled or stolen and you need to buy a new one, you can use gap insurance to bridge the difference between the payout from your auto insurance (based on your vehicle’s depreciated worth) and the remaining balance on your auto loan.

For example, say you bought a new SUV for $26,400. But not long after, you total the vehicle. Bummer. Your insurance will cover $22,000 based on the insurer’s assessment of your vehicle’s value at the time of the loss. Unfortunately, you still owe $25,000 on the loan. Translation: You have to pay your lender the $3,000 difference out of pocket.

If you had gap coverage, you could file a claim with your insurer to cover the difference so you wouldn’t be responsible for the total cost.

How does gap insurance work?

Gap coverage may be available as an addition to your existing auto comprehensive coverage, or you can purchase it independently. Typically, the insurer will require that you or your business are the original owner or lessee of the vehicle.

If you total your vehicle — meaning the costs to repair it are deemed more expensive than its value — or if it gets stolen, your car insurance policy provider will determine the payment you’ll receive (based on a calculation of its condition, mileage, special features and more). If that payment is less than the amount owed on your auto loan, you can file a claim with your gap insurance provider. Once approved, gap insurance will pay the outstanding balance on your auto loan directly to the loan provider.

Gap insurance can come to the rescue whether you or someone else is at fault for an accident.

What does gap insurance cover?

Your vehicle’s actual cash value at the time of the loss — not what you owe on it — determines standard insurance settlements. Unfortunately, that’s where they can fall short because, as noted, that value can plummet faster than the social status of a canceled celebrity.

Gap insurance covers the balance left over on your auto loan. The coverage will go into effect in the event of a covered total loss due to an accident or from someone stealing your vehicle.

Who needs gap insurance coverage?

According to the Federal Reserve, gap coverage is often included when leasing a vehicle, but not always.2 It is not usually included when financing a vehicle for ownership.

The following factors make your vehicle a good candidate for gap insurance coverage:3

  • When your down payment covers less than 20% of the cost
  • If your vehicle financing agreement is for 60 months or longer
  • If the vehicle you are purchasing tends to depreciate faster than others
  • If your new car loan includes rolled over negative equity from a previous loan

Do you need gap coverage if you have auto insurance?

Gap coverage is recommended if you have a coverage gap. As we discussed, the coverage gap is the difference between auto insurance coverage and your remaining auto loan. Standard insurance covers the actual cash value of your vehicle, while gap insurance covers any leftover amount.

Similar but different types of vehicle insurance include:

  • Loan or lease payoff coverage that pays out no more than 25% of your vehicle’s value
  • New car replacement coverage that pays the value, minus your deductible, of a brand-new vehicle that is the identical make and model to your totaled vehicle

Some insurers will bundle a combination of these types of insurance coverage. You will not likely need to purchase all of them independently.

How much does gap insurance cost?

Like standard car insurance, the cost of gap insurance will depend on various factors that include your vehicle type, location and driving history. Adding gap insurance to a standard collision and comprehensive policy adds about $20 per month, on average.4

Is gap coverage worth it?

Whether gap coverage is worth it or not depends on your situation. To figure it out, analyze the purchase price of your vehicle, how much it is expected to depreciate in the coming years and the cost of gap coverage. For example, if you or your business buy or lease an older model vehicle that is already nearing full depreciation, there may not be much of a gap between the loan and the actual cash value.

Beyond cost-benefit analysis, consider local crime rates and your driving history to estimate the likelihood that the vehicle will be totaled or stolen.

Drive with peace of mind

That’s the wrap on gap insurance coverage. If you’re financing a new vehicle and buying commercial auto insurance, filling your coverage gap may make sense for you. Policies typically have a low monthly premium and you won’t have to worry about high out-of-pocket costs if you suffer a total loss or someone decides to go all “Grand Theft Auto” on your vehicle.

Plus, you can usually sign up for it at the dealership when you buy your vehicle. Down the road, when the gap between your loan amount and the vehicle value is more aligned, you might want to drop the coverage.

And for your liability insurance needs, look to Thimble. We help you shift gears quickly: Instantly modify or cancel your small business insurance with no hard feelings. Get a quote today so you can get moving.


  1. Edmunds. Depreciation Infographic: How Fast Does My New Car Lose Value? 
  2. Federal Reserve Bank. Keys to Vehicle Leasing. 
  3. Insurance Information Institute. What is Gap Insurance? 
  4. Insurance Information Institute. What is gap insurance?