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Do you need gap insurance on a used car?

If you took out a loan to buy a used car, you may want to buy gap insurance.

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Rachael BrennanSenior Editor & Licensed Auto Insurance ExpertRachael Brennan is a senior editor and a licensed auto insurance expert at Policygenius. Her work has also been featured in MoneyGeek, Clearsurance, Adweek, Boston Globe, The Ladders, and AutoInsurance.com.

Published|4 min read

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Gap insurance is an optional type of car insurance coverage that protects drivers who lease their car or have a loan on their vehicle. It is common for drivers who buy a new car to purchase gap insurance in case their car is stolen or totaled; in fact, it may be required by your lessor or lender.

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But do you still need gap insurance if you buy a used car? If you took out a loan to buy a used car, you may still benefit from buying gap coverage, even if it’s not required.

Key takeaways

  • Gap insurance is a type of coverage for drivers who have a loan or a lease.

  • If your car is stolen or totaled in an accident, gap insurance pays off anything that’s left on the loan or lease after the regular claim pays out.

  • While gap coverage is most common with new vehicle purchases, drivers who buy a used car may also need to buy gap insurance.

  • Gap insurance may or may not be worth it for a used car, depending on the age of your car, the length of your loan, and the amount of your down payment.

What is gap insurance for a used car?

Gap insurance is a type of coverage that protects drivers who have a loan or a lease on their car. Because the value of a vehicle can depreciate so quickly, you may find yourself with negative equity (which means you owe more than the value of the car) if your car is stolen or totaled while you are paying off your car loan.

Basically, as long as you have full coverage, your car insurance will pay out for a stolen or totaled vehicle — but that payout might not be enough to fully pay off your loan. Gap insurance steps in to pay off the rest, so you can walk away.

While gap coverage is most common with new car purchases, drivers who buy a used car may also need to buy gap insurance. In fact, depending on the terms of your loan, you may be required to purchase gap insurance to protect yourself and your lender in case your vehicle is totaled.

→ Read more about used car insurance

How does gap insurance work for a used car?

Gap insurance works the same way whether you buy a car new or used (and it may be required either way).

With a new car, the value of the car goes down the moment you drive it off the lot. If you took out a loan for the vehicle and it gets totaled or stolen, you will end up owing more than the actual cash value (ACV) of your car, which can leave you in a position where you are stuck making payments for a car you no longer own. 

If this happens, gap insurance will pay the difference between what you owe and the value of the car.

But the value of a used car is more stable than a brand new car, which means you won’t lose value immediately after purchasing a used vehicle. The lower purchase price of a used car and the slower depreciation rate mean that gap insurance may not be necessary for a used car.

However, if your down payment was less than 20% of the car's ACV or your loan goes for more than three years (or both!) gap insurance may be a good choice for you. And if your lender requires gap insurance for your used car, then you definitely need it.

→ Read more about what happens when your car is paid off

Is gap insurance worth it on a used car?

Whether or not gap insurance makes sense when you purchase a used car depends on a number of factors, including:

The age of your car

When you buy a new car it depreciates very quickly, losing a big chunk of its value as soon as you drive it off the lot. But older vehicles depreciate at a much slower rate, which means if you buy a used vehicle that is more than three or four years old, you likely won’t need (and your lienholder probably won’t require) gap insurance.

The length of your loan

The longer your loan, the more likely you are to need gap insurance. This is because a longer loan means smaller payments spread out over a long period of time, which means your car is probably depreciating faster than you are paying off your loan.

Your down payment amount

A small down payment (less than 20% of the value of your vehicle) leaves you more likely to need gap insurance if your car is totaled in an accident. The larger your down payment, the less likely you are to need gap insurance. 

What is the most gap insurance will pay for a used car?

The maximum amount gap insurance will pay is determined by your insurance company, and not all companies have the same gap insurance process. For example, Progressive pays a maximum of 25% of your car’s ACV for a gap insurance claim, while Allstate’s Guaranteed Asset Protection coverage (which is its version of gap coverage but is not an insurance product) will waive up to $50,000 of your balance due if you experience a total loss.

→ Read more about how long it takes for gap insurance to pay out

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Frequently asked questions

Do you get gap insurance back if you don't use it?

No, you won’t get a refund on your gap coverage if you don’t use it. However, if you cancel the policy and you paid for coverage you aren’t using anymore, you will get a prorated refund. And you can drop gap insurance once your loan is paid off.

What is the purpose of gap insurance on a car?

Gap insurance is designed to pay the difference between the value of your loan and the ACV of your car if it gets totaled — it literally covers the gap between what you owe and what your car is worth, hence the name.

When would an insurance company deny me gap coverage?

Some insurance companies have restrictions on gap coverage. For example, some insurance companies only offer gap insurance to the original owner of a vehicle, while other insurance companies won’t sell gap insurance for vehicles more than three or four years old.

When can you cancel gap insurance?

The best approach is to cancel your gap insurance when your loan is less than the ACV of your car, but you can always talk to your insurance expert if you are unsure whether or not you should continue paying for gap insurance.