Do You Actually Need Gap Insurance?
Gap cover pays the difference between what your car is worth and what you owe. If there is no difference, it can never pay out a penny. Nothing down over 84 months leaves you $4,734 short after a year, peaking at $7,383. Put $10,000 down over 48 months and you are $9,062 ahead from the start - and the cover is wasted money.
The question the sales pitch skips
Gap cover pays the difference between what your car is worth and what you owe, if it is written off or stolen.
Which means the only question that matters is: is there a difference?
If your car is worth more than you owe, gap cover cannot pay out a penny. It is not bad value in that situation - it is worth precisely nothing.
Nobody selling it leads with that.
When a gap genuinely exists
A $35,000 car, nothing down, 84-month loan at 7%, losing 25% a year. From the gap insurance calculator:
| After | You owe | It is worth | Gap |
|---|---|---|---|
| 12 months | $30,984 | $26,250 | $4,734 short |
| 32 months (worst) | $7,383 short | ||
| 72 months | closes |
If this car were written off at month twelve, the insurer pays $26,250 and you still owe $30,984. You would owe $4,734 on a car you no longer have, due immediately.
That is a real risk and gap cover is the right answer to it.
Notice also that the gap gets worse before it gets better, peaking around month 32. It grows for nearly three years because the car keeps losing value faster than the loan comes down.
When it is wasted money
The same $35,000 car with $10,000 down over 48 months:
You are $9,062 ahead from day one. There is never a gap, at any point in the loan.
Buying gap cover here would be paying for something that could not pay out under any circumstances.
The difference between the two scenarios is entirely the deposit and the loan length. Nothing about the car changed.
The date to put in your calendar
On the first example the gap closes around month 72.
From that point on, gap cover can no longer pay out anything - the car is worth more than you owe.
If you are still paying for a policy at month 73, that money is doing nothing at all. You can usually cancel and get a partial refund for the unused portion, particularly if you paid up front.
Almost nobody does this, because nobody tells them the date. Work it out when you buy the policy and put it somewhere you will see it.
Where to buy it, and what it should cost
Not from the dealer, as a rule. Dealers routinely charge several times what your own motor insurer would for the same cover. Worse, rolling it into the loan means paying interest on it for the life of the loan.
Ask your existing insurer first - it is often a modest addition to a policy you already hold. Then compare a standalone policy.
Also check whether you already have it. Gap cover is sometimes bundled into a loan or a policy without being obvious, and people occasionally buy it twice.
What the policy actually pays
Read this part rather than assuming:
- The deductible - sometimes covered, often not
- Missed payments and late fees - usually excluded
- Rolled-in negative equity from a previous car - frequently excluded, which matters because that is exactly the situation that creates the largest gaps
The marketing is vaguer than the contract. The contract is what pays.
The better answer, where you can manage it
The reason a gap exists at all is a small deposit against a long loan. Change either and it shrinks or disappears.
A bigger deposit removes the need for the product entirely, and saves interest at the same time. That is not always possible - but where it is, it beats insuring against a problem you could avoid creating.
What to check
- Work out whether you have a gap at all. If not, decline.
- Find the peak and the closing date. Both are useful.
- Check whether you already have cover.
- Compare your insurer against the dealer - the difference is usually large.
- Diarise the date it stops being useful, and cancel then.
Work out your own position in the gap insurance calculator - it shows whether a gap exists, how big it gets, and roughly when it closes.
Common questions about gap insurance
What does gap insurance cover?
The difference between what your car is worth and what you still owe, if it is written off or stolen. Your ordinary insurer pays the car's value on the day. If you owe more than that, the rest is yours to find and it is due immediately. Gap cover pays that difference.
Do I need it?
Only if a gap exists. Nothing down over 84 months creates a real one - $4,734 after a year, peaking at $7,383 around month 32. But $10,000 down over 48 months leaves you ahead from the start, and the cover could never pay out anything.
When does the gap close?
When the loan balance falls below the car's value. On a $35,000 car with nothing down over 84 months it takes until about month 72. After that, gap cover cannot pay out anything at all - and if you are still paying for it, that is pure waste.
Where should I buy it?
Rarely from the dealer. They typically charge several times what your own motor insurer would, and rolling it into the loan means paying interest on it too. Ask your insurer first, then compare a standalone policy.
Does it cover my deductible or missed payments?
Sometimes the deductible, often not. Missed payments and late fees are usually excluded. Read what the policy actually pays before assuming it covers everything - the marketing tends to be vaguer than the contract.