Should I Get Gap Insurance From a Dealer or Insurance Company?
It’s almost always better to get gap insurance from an insurance company rather than a car dealer. Click here to learn why!
Written by Pat Roache
Reviewed by Hillary Kobayashi
Gap insurance
from an auto insurance company will almost always be cheaper than the same coverage from a dealer. However, you may have to buy gap insurance from your dealership if you can’t find the coverage you need from an insurance provider.Also known as guaranteed asset protection, gap insurance covers the difference between what you owe on your auto loan and your car’s actual cash value in a total loss payout. Investing in gap insurance is typically worth it for the first year of new vehicle ownership, when your loan balance can quickly exceed the depreciated value of your car.
A lender will typically require you to add this type of coverage to your
car insurance
policy if you take out a car loan
to purchase a new car. However, you have some options when it comes to the cost of gap insurance coverage—especially depending on where you buy it. ‘Without further ado, here’s our guide to help you decide whether you should purchase gap insurance from a dealer or an insurance company.
Should you buy gap insurance from a dealership?
More often than not, you should avoid purchasing gap insurance from a car dealer. Dealerships make several claims about the advantages of buying gap insurance from them, but it will almost always cost more. Consider the following.
Pros of buying gap coverage from a car dealership
Not all car insurance companies offer gap insurance, so a gap coverage policy from your car dealership can be enticing if your current insurance provider doesn’t offer it. Car dealerships also claim there are a few procedural advantages to choosing their gap coverage over that of an insurance company, but these claims don’t always hold up.
For example, a car dealership may cover your
deductible
when an insurer won’t—that one’s often true. However, some dealers claim that insurance companies won’t cover the entire value of your loan amount in an insurance payout. While some insurers only agree to cover 25% of your loan amount, many will cover the full amount.Cons of buying gap coverage from a car dealership
Gap coverage that is purchased from a car dealership is often hundreds of dollars more expensive than gap insurance from an insurance company. In addition, the cost of this coverage will be factored into your total loan amount, meaning it will be included in the
total interest paid on your car loan
.So not only are you paying more on the coverage in general, but you’ll also see an increase in your car’s loan payments. You typically won’t be able to cancel car dealership gap coverage and get a full refund outside of a limited grace period. Meanwhile, you could get the same coverage from your insurance company for much less money.
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Can you buy gap insurance from an insurance company?
Yes, you can buy gap insurance from an insurance company for a relatively cheap price, although not every provider offers this coverage.
Allstate
, Nationwide
, and AAA
offer traditional gap coverage. State Farm
and Progressive
offer different types of loan coverage that work similarly (but may include certain limits to what and how much you can cover). Geico
does not offer any gap coverage.Here are the pros and cons of buying this coverage from an insurance provider.
Pros of buying gap coverage from an insurer
A gap insurance policy from an insurer is typically much cheaper than gap coverage from a car dealership. This is because your car insurance payments will not accrue interest.
Canceling gap coverage with an insurance provider is also much easier than with a car dealership. You may choose this coverage when you’ve made a small down payment on a new or leased car, even when a lender hasn’t required it as part of your loan terms.
However, you’ll want to cancel this coverage once the value of your vehicle exceeds your remaining loan balance.
Cons of buying gap coverage from an insurer
You may not always be able to get gap insurance from your current provider. And while you could just go to another provider for this coverage, many require you to carry a full-coverage insurance policy with
collision coverage
and comprehensive coverage
before you can qualify for gap insurance.Having these types of insurance isn’t necessarily a bad idea for a new car, but it brings up another roadblock: the effects of
filing a car insurance claim
. A gap insurance claim may cause your insurance rates to go up—you would avoid this with gap coverage from a dealership. This doesn’t exactly outweigh the other cost factors, though.How much does gap insurance cost from a dealership vs. an insurance company?
Gap coverage typically costs between $400 and $700 from a car dealership before any interest is taken into account. Gap insurance from a provider typically costs $20 to $40 a year when added on to a preexisting policy, or $200 if bought on its own.
Another pro for buying gap insurance from an insurance company is that you can easily compare
car insurance quotes online
to make sure you’ve found the most affordable insurance rate while getting all the coverage you need!"I felt like I was paying too much for my insurance policy, so I downloadedJerry. I literally only typed in 3 pieces of info and Jerry found my current insurance. In a few minutes, they pulled up 2 Progressive policies that showed $900 in savings over 6 months!” —Maeve J.
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FAQs
How does gap insurance work?
A financed car typically loses a lot of value when you drive it off the lot, and that can leave you with a gap between the amount you owe on your loan and your vehicle’s actual cash value (ACV). In the event of a total loss, gap insurance will cover this gap. Without it, you would only receive a cash payout for the totaled car’s ACV and you’d be left paying the remaining loan balance out of pocket.
Can you add gap insurance to any insurance policy?
No. You can only add gap insurance to your insurance policy if your provider currently offers it. For example, Geico does not offer gap insurance, but Nationwide and Allstate do. That said, many insurance companies require you to purchase a full-coverage insurance policy before you can buy gap coverage.
Is gap insurance necessary when buying a car?
Gap insurance is often required by lenders in order to finance a car. It can still be a useful coverage when it is not required, but you may not necessarily need it. You’ll want to consider gap insurance if you’ve made a small down payment, the length of your loan term is more than five years, or if your loan has a high interest rate.
Essentially, it’s up to you to crunch the numbers to decide if and when gap insurance is worthwhile for your financed vehicle.
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