Does Gap Insurance Cover Depreciation of Cars?

In the event of a vehicle loss, gap insurance pays off the remainder of your loan if you owe more than your car is worth. A full-coverage insurance policy pays your lender only for the vehicle's market value, so your insurance may not pay off your entire loan. Guaranteed asset protection, or gap, insurance does not necessarily cover a vehicle's depreciation.

Coverage

Lenders require borrowers to purchase and maintain a full-coverage insurance policy throughout a loan term. In the event the car is totaled, the insurance company does not pay off your entire loan amount. It only pays for the vehicle's market value. If you owe more than your vehicle is worth, because of depreciation or carrying money over to your loan, a gap insurance policy covers the "gap" between the vehicle's value and loan payoff amount. Gap insurance is unnecessary for vehicles without a loan or negative equity.

Benefits

If your vehicle was declared a total loss and your loan is not paid off, it's your responsibility to pay off the remaining loan balance. Without gap insurance, you might owe thousands more on your balance, which may prove difficult to pay when you don't have a car. Also, trying to pursue an additional car loan while you still have one may prove difficult. Most lenders require buyers to pay off existing car loans before borrowing another. Gap insurance can eliminate this problem.

When to Pass on Coverage

If you pay cash for a car, gap insurance serves no purpose. If you put a large down payment toward your purchase or have an equitable trade-in vehicle, your loan amount and car value is likely in line. To determine whether you are upside down, or owe more than the vehicle's worth, check the value of the car you want to purchase. Use the Kelley Blue Book website or Edmunds.com to appraise your vehicle's value. Don't purchase the policy unless you need it.

Providers

Purchase gap insurance from a dealership, insurance provider as a policy add on or from the lender who provides your loan. Check the prices from each provider, as many stand to make a profit from selling the coverage. Gap insurance should cost several hundred dollars at most, but dealerships or subprime lenders can charge more than $600. Gap insurance should cost around $100; any amount beyond this price is profit. Be sure to shop prices and negotiate if necessary.