Use our payoff worksheet
The policy pillar guide includes calculators that show when gap coverage becomes unnecessary.
Vehicles depreciate faster than most loans. If your car is totaled during that early period, your insurer pays only actual cash value (market value minus depreciation). If you still owe more than that, you pay the balance unless you have gap coverage. Here's how to decide if you need it and when to drop it.
Gap insurance covers the "negative equity" between your vehicle's value and the outstanding loan or lease balance after a total loss. It is essential for drivers with small down payments, long loans, or leased vehicles.
1. Who needs gap insurance?
- Drivers who put less than 20 percent down on a new car.
- Borrowers with 60- to 84-month loans.
- Anyone who rolled negative equity from an old loan into a new one.
- High-mileage commuters whose cars depreciate faster than average.
- Leases (most contracts already include gap; confirm it before paying twice).
2. Where to buy it
- Dealer: Convenient but often costs $600-$1,000 financed into your loan.
- Lender: Similar pricing to the dealer but may refund unused coverage if you pay off early.
- Auto insurer: Usually $5-$15 per month and simple to cancel when you no longer need it.
3. How to calculate your gap
Use this three-step method:
- Find your current loan payoff (ask your lender for the exact number).
- Check your vehicle's wholesale value using guides such as J.D. Power or Edmunds.
- Subtract. If the payoff exceeds the value, you have a gap.
4. When to drop gap
Review the numbers every six months. Cancel gap when:
- The loan payoff is equal to or less than the car's value.
- You refinance into a shorter term and quickly build equity.
- You sell or trade the vehicle.
Gap insurance is inexpensive peace of mind. Add it when you buy a car with little equity, then drop it as soon as your payoff balance falls below the vehicle's value.