Gap Insurance – What is It and What to Do About It

by Doug Zanes | Last Updated: July 24, 2015

Let us break it down for you first before we get into the nitty gritty of Gap Insurance…

Gap insurance in a nutshell is this: It’s insurance covers the gap between what you owe on your auto or motorhome loan and its current market value.

If you’re in an accident and your insurance company decides your vehicle or motorhome is totaled (also called “total loss”), your collision coverage…will only pay you the current market value…

And…it won’t cover any amount you may still owe on your loan…EEK!

Here’s an example of how it works… We can use you as a hypothetical:

You have a loan balance on a 2011 vehicle and the balance is: $18,000…

The actual cash value of the car is: $16,000…

This means that the payoff without gap coverage is $16,000 (minus your deductible)…

And this means…

You still owe $2,000

*Insert Angry Face HERE* ← Yeah we feel you…

But with Gap Insurance, you would have a coverage of $18,000 thus making the amount you owe $0


Before you jump to filling the Gap…

Here’s what Gap Insurance doesn’t cover…

It doesn’t cover any interest the lender charges you, or any late fees or missed loan payments.

Don’t have gap insurance? Here’s something else to consider

If you don’t have gap coverage, ask your lender about extending your existing loan to your replacement vehicle….

This is called a collateral exchange. The lender adds the payoff amount (after the insurance payment) on your existing loan to your replacement vehicle loan.

So now the question is…. Is Gap Insurance worth it?

Gap insurance can sometimes feel like one of those expenses that seem like a waste of money…

Until you need it!

In fact, unless you have suffered the total loss of a vehicle through either collision or theft, you may be unfamiliar with car gap insurance and how much it could ultimately save you….

In fact, the moment you drive a new vehicle off the dealer lot, your auto insurance is probably inadequate to protect you financially in the case of a total loss…

Here’s why: Your regular auto insurance is designed to pay the lender the vehicle’s current cash value NOT the current loan balance…


The difference can be thousands of dollars.

And we all know once your new car — owned or leased — leaves the lot, it is considered a used car and the value of it drops significantly.

Soooooo… .Should you get it?

If you own your car outright or have a lot of equity in it, you don’t necessarily  need gap insurance.

You’re a likely candidate for gap insurance if you:

  • Lease a vehicle.
  • Finance for 60 months or more.
  • Put less than 20 percent down.
  • Roll negative equity from a previous vehicle loan into a new vehicle loan.
  • Drive more than the average 15,000 miles annually.
  • Purchase a vehicle with a history of high depreciation rates.

Definitely talk to your local insurance company for a better idea if Gap Insurance is right for you!

*Thank you, for the additional information on qualifying Gap Insurance terms.



Doug Zanes
Doug Zanes: Founding Attorney Raised in Douglas, Arizona, and went to college at Arizona State University and graduated from law school at St. Mary’s University School of Law in Texas. Doug began practicing law in Phoenix Arizona in 1997.
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