—or guaranteed asset protection insurance—covers the difference between the actual cash value of your vehicle and the amount you owe on your loan if your car is totaled.
In other words, if your car is totaled and you owe more on your loan than the car is worth, gap insurance can cover the deficit.
Here’s how it breaks down:
Vehicles typically lose around 20% of their value within the first year
It's not unusual for the loan balance to exceed the car's actual cash value during the early years of ownership
If your vehicle is declared a total loss following an accident, a standard auto insurance policy with collision coverage will only reimburse you for the actual cash value of your car at the time of the claim
If this reimbursement falls short of what you still owe on your car loan, gap insurance covers the difference
When do you need gap insurance?
You need gap insurance if the coverage limits of your standard auto insurance policy fall short of the vehicle’s total value.
Gap insurance is usually a good idea if you:
Lease your vehicle
Finance your car for an extended period (five years or more)
Make a low down payment on your vehicle (less than 20%)
Drive a highly customized vehicle or a specific make or model that depreciates quickly
Rolled over negative equity from a previous vehicle into your current loan
Gap insurance in Texas can’t cost more than 5% of your loan amount
According to state law, gap insurance in Texas cannot cost more than 5% of your loan amount.
When selecting a coverage amount for gap insurance, take into account your car’s outstanding loan balance and its projected depreciation over time
Factors like your car's specific make and model, rate of depreciation, and loan term length should influence your insurance protection level to ensure you have adequate coverage in case of a loss
While your dealership or lender might offer a gap insurance policy when you finance or lease a vehicle, it’s prudent to compare options from various insurance companies.
Buying coverage on the spot is convenient, but obtaining gap coverage directly from insurers is cheaper. And adding gap insurance to your existing car insurance policy could result in additional savings!
: State Farm offers a Payoff Protector benefit that is only available if you have a State Farm auto loan—it is not an insurance product. This benefit covers the balance of your State Farm car loan if your vehicle is totaled or stolen and your primary insurer has already paid its share.
There are dozens of other insurers that offer gap insurance, and it’s a good idea to compare rates between insurance companies, your lender, and dealerships to see who will give you the best deal.
Remember: Shopping around can help you find the best rates.
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FAQs
Do you need gap insurance in Texas?
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Gap insurance isn't mandated by law in Texas and auto lenders can't require it. That said, it’s worth purchasing gap insurance if you made a small down payment on a new vehicle, have taken out a long-term car loan, or own a vehicle model that tends to depreciate quickly.
What’s the difference between gap insurance and new car replacement coverage?
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Gap insurance covers the difference between the vehicle's actual cash value and the remaining loan balance. New car replacement insurance, on the other hand, furnishes you with a brand-new car of the same make and model—a “replacement,” minus the deductible.
Both gap insurance and new car replacement coverage offer financial protection if your car is totaled, mitigating the impacts of depreciation.