Thinking about gap insurance for your used car? You’re smart to consider it. While many people associate gap insurance with new vehicles, it can be valuable for used cars too—in the right circumstances.
Gap insurance covers the “gap” between what your car is worth and what you owe if your vehicle is totaled. But is it worth the extra cost when you’re buying used? Let’s break it down so you can make the right call for your situation.
What Exactly Is Gap Insurance?
Gap insurance (Guaranteed Asset Protection) is a special type of coverage that pays the difference between your car’s actual cash value and your outstanding loan balance if your vehicle is declared a total loss.
Here’s a simple example: You buy a used car for $20,000. Six months later, it’s totaled in an accident. Your insurance pays $16,000 (the current value), but you still owe $18,000 on your loan. Without gap insurance, you’d be on the hook for that $2,000 difference—while no longer having a car.
Gap insurance would cover that $2,000 gap, saving you from paying for a car that no longer exists.
How Used Cars Depreciate
Used cars don’t lose value as quickly as new ones, but they still depreciate. A typical used car will lose 10-15% of its value annually.
This depreciation creates that potential “gap” between your car’s value and what you owe—especially in the early years of ownership.
| Year of Ownership | Typical Depreciation Rate for Used Cars |
|---|---|
| Year 1 | 10-15% |
| Year 2 | 10-15% |
| Year 3 | 8-12% |
Some vehicles depreciate even faster. Electric vehicles can lose up to 50% of their value within five years, while luxury models and high-mileage vehicles also experience steeper declines.
When Gap Insurance Makes Sense for Used Cars
Not every used car purchase warrants gap insurance. Here are scenarios where it typically makes the most sense:
You Made a Small Down Payment
If you put down less than 20% on your used car, you’re starting your loan term with little equity. The smaller your down payment, the more likely you are to be “upside down” on your loan (owing more than the car is worth).
You Have a Long Loan Term
Financing your used car for 60 months or longer? You’re at higher risk of negative equity. These extended repayment schedules mean you build equity more slowly, leaving you vulnerable to the gap for a longer period.
You Bought a Higher-Depreciation Vehicle
Some used cars lose value faster than others, including:
- Electric vehicles
- Luxury models
- Cars with poor reliability ratings
- Vehicles in less desirable colors or configurations
If you purchased one of these, gap insurance offers extra protection against their steeper depreciation curve.
You Rolled Over Negative Equity
Did you roll over the remaining balance from a previous car loan into your new used car loan? This situation virtually guarantees you’re starting with negative equity, making gap insurance extremely valuable.
When Gap Insurance Probably Isn’t Worth It
Gap insurance isn’t for everyone. You likely don’t need it if:
Your Used Car Is More Than 3 Years Old
Most insurers limit gap coverage to newer used cars—typically those under three years old. This is because older used cars have already gone through their steepest depreciation period.
You Made a Large Down Payment
If you put down 20% or more, you’ve likely offset much of the initial depreciation, making gap insurance less necessary.
Your Loan Term Is Short
With a 36-month or shorter loan, you build equity quickly, reducing the “gap” period significantly.
You Owe Less Than Your Car Is Worth
If you already have positive equity in your vehicle (it’s worth more than you owe), gap insurance offers no benefit since there’s no “gap” to cover.
How Much Gap Insurance Costs for Used Cars
Gap insurance is relatively affordable, but there’s a huge price difference depending on where you buy it:
| Gap Insurance Source | Typical Cost | Notes |
|---|---|---|
| Car Insurance Company | $40-$60 per year | Most affordable option |
| Dealership | $500-$700 total | Usually a one-time fee added to your loan (which means you pay interest on it too) |
| Lender/Bank | $200-$400 total | Mid-range option |
The smart move is to check with your auto insurer first—it’s almost always the most cost-effective option.
Real-Life Example: Gap Insurance in Action
Let’s look at a realistic scenario:
Sarah buys a 2-year-old sedan for $22,000. She makes a $2,000 down payment and finances $20,000 over 72 months at 6% interest. Two years later, her car is stolen and not recovered.
At this point:
- The insurance company values her car at $15,000
- She still owes $16,800 on her loan
- Without gap insurance, Sarah must pay the $1,800 difference out-of-pocket
- With gap insurance (costing about $100 over those two years), that difference would be covered
For Sarah, the $100 gap insurance premium saved her $1,800—a clear win.
Important Limitations of Gap Insurance
Before purchasing gap coverage, understand what it doesn’t cover:
Gap Insurance Doesn’t Cover:
- Your insurance deductible (you’re still responsible for this)
- Late payment fees or penalties on your loan
- Extended warranties or other add-ons financed with your vehicle
- Mechanical failures or repairs
- Medical bills or property damage from an accident
These limitations are standard across most gap policies.
How to Get the Best Deal on Gap Insurance
If you’ve decided gap insurance makes sense for your used car, here’s how to get it without overpaying:
Check With Your Current Auto Insurer First
Adding gap coverage to your existing auto policy is almost always the most affordable option, typically costing $40-$60 per year.
Compare Multiple Providers
Get quotes from at least three sources—your auto insurer, your lender, and an independent provider.
Avoid Dealer-Offered Gap Insurance
Dealerships often mark up gap insurance by 200-300% and roll it into your loan, meaning you’ll pay interest on it for years.
Cancel When No Longer Needed
Gap insurance is only necessary while you owe more than your car is worth. As you build equity, check your loan balance against your car’s value (using Kelley Blue Book) every 6-12 months. When you have positive equity, you can cancel your gap coverage.
The Bottom Line: Making Your Decision
Gap insurance for a used car comes down to your financial situation and risk tolerance. Consider these key factors:
- Your down payment size: Less than 20%? Gap insurance is worth considering.
- Your loan term: Financing for 60+ months? The protection makes more sense.
- Your car’s depreciation rate: Research how quickly your specific model loses value.
- Your ability to cover a loss: Could you afford to pay thousands out-of-pocket if your car is totaled?
For many used car buyers, especially those with minimal down payments and longer loan terms, the modest cost of gap insurance through an auto insurer provides valuable peace of mind and financial protection.
Recent data shows the average gap claim settlement has reached over $7,200, with some luxury vehicle claims exceeding $34,000. For just a few dollars a month, that’s protection worth considering—even on a used car.
How to Know When to Cancel Your Gap Insurance
Gap insurance isn’t a permanent need. You should consider canceling it when:
- Your loan balance falls below your car’s value (you have positive equity)
- You pay off your car loan completely
- You sell or trade in the vehicle
Most insurers will refund any unused premium when you cancel, so there’s no reason to keep paying for coverage you no longer need.
Remember to check your equity position periodically by comparing your current loan balance with your car’s estimated value from trusted sources like Kelley Blue Book or NADA.
