What Is GAP Insurance and Do You Actually Need It?

Fast Facts 

• GAP insurance for used cars covers the difference between what you owe on your car loan and what your insurance pays if your vehicle is stolen or totaled.
• GAP insurance is most useful when you have a small down payment, a long-term car loan, or financing a vehicle that depreciates quickly.
• Hawthorne Auto recommends GAP insurance for used cars that will be paid off in installments.

When thinking of purchasing a used car, you may have come across the term GAP insurance. But what is GAP insurance? Guaranteed asset protection (GAP) insurance helps you pay off the remainder of your auto loan — bridging the “gap” between your car’s actual cash value and the amount you still owe your lender. Cars lose value quite quickly, so GAP insurance is a good way to avoid a financial disaster. 

How does GAP Insurance Work When Your Car Is Totaled

Here’s a quick explanation of GAP insurance. The minute you drive your car off the lot, it can lose up to 20% of its value. Say you start financing a used car worth $20,000, and a year later, you wind up in a fender bender. If your insurance deems the car “totaled,” it will cover the car’s current cash value. With the 20% depreciation, that’s $16,000. 

The problem is that you will still be responsible for the additional $4,000 on your loan. This is where car loan gap coverage comes in handy — it will cover that extra $4,000. The same thing applies when your car is stolen and never found. So, do you need GAP insurance? As the state of vehicle theft in California continues to rise and accidents happen, GAP insurance is a smart choice for many drivers.

Do You Actually Need GAP Insurance? Key Factors to Consider

Buy here, pay here dealerships like Hawthorne Auto offer bad-credit used car shoppers the opportunity to drive a car off the lot that same day. This is a great advantage for many, but it’s important to know all the details first. There are a few factors to consider before adding GAP insurance to your car loan plan.

The first is your down payment percentage. If you’re in a financial position where you can pay for 20% or more of your car loan, you’re starting at a good place, which is keeping up with the car’s depreciation value. On the flip side, if you have a smaller down payment, GAP insurance becomes more important. 

Another consideration is the length of your car loan. Shorter-term loans may not need the coverage, but longer-term loans factor in the continued depreciation, making GAP insurance the smart choice. 

The type of car you get comes into play as well, as some cars hold better value than others. For example, luxury vehicles depreciate quickly, whereas more economical family SUVs or commuter cars hold their value longer. Obviously, if your car’s value depreciates quickly, it makes more sense to pay for GAP insurance. The best way to know how quickly your vehicle will depreciate is to look at something like the Kelly Blue Book value. Check out the seven most affordable commuter cars as well.

Finally, the last thing to consider is your current financial situation. Could you pay a few thousand or more if your car is totaled or stolen tomorrow? If your answer is not a resounding ‘yes,’ you should pay a bit extra for GAP insurance. 

Is GAP Insurance Worth It for Used Cars?

There is a common misconception that GAP insurance is only useful for newer car loans. This is not true. GAP insurance applies to used cars, and while newer vehicles do depreciate quickly, used cars can still lose their value faster than you pay off your loan. 

When should you buy GAP insurance? If your loan balance exceeds your car’s actual cash value, GAP insurance can protect you. It’s usually quite affordable for used car loans since the overall loan amount is typically lower than with brand new vehicle payment plans. 

Do I Need GAP Insurance If I’m Financing a Car at a Buy Here Pay Here Dealership?

Buy Here Pay Here Dealerships like Hawthorne Auto Square are made for people who have difficulty qualifying for traditional car loans, offering a second chance when dealerships or banks decline an auto loan. When you finance through a BHPH dealership, you’re usually working with non-traditional loan structures that make GAP coverage very beneficial. This means you may be financing a larger percentage of the vehicle’s value or have a longer loan term that better fits your budget. 

At Hawthorne Auto, we recommend purchasing GAP insurance to protect you from unexpected financial burdens. 

GAP Insurance Costs: What You Should Expect

The cost of your GAP insurance depends on the kind of car you purchase. Typically, at Buy Here Pay Here dealerships in Hawthorne, GAP insurance is a one-time payment, between $400 to $800, that lasts for the life of your loan.

The real advantage here is convenience and certainty — it’s a one-time decision that’s built right into your car loan financing, so you don’t have to worry about annual renewals. At Hawthorne Auto, we structure our GAP coverage plans to provide maximum protection for our customers. We’re always transparent about what you’re paying for and what you’re getting in return.

Get Help Choosing the Right Coverage for Your Next Used Car

If you’re dealing with credit challenges and want to get a car as fast as possible, it can be hard to navigate the world of car loans, coverage plans, and things like GAP insurance. Hawthorne Auto Square makes it easy and helps you choose the right coverage for your financial situation. Don’t be afraid to ask questions, compare prices, or re-review your auto loan. We want you to drive away feeling confident and well protected. Contact us today.

Frequently Asked Questions 

How long should you keep GAP insurance?

Since it’s a one-time payment at BHPH dealerships, you will keep it for the entire life of the car loan. However, if you end up paying off the car quicker than your loan payment terms, you may be eligible for a partial refund.

Will GAP insurance pay off my entire loan balance?

No, it won’t. It covers the current cash value of your vehicle if the vehicle is totaled or stolen. You’re still responsible for making your loan payments on time. 

Does GAP insurance cover negative equity?

The short answer is no. Negative equity means you owe more money on your car loan than the car’s cash value, usually from only putting down a really small down payment.

Is GAP insurance required by law?

No, GAP insurance is never required by California law. However, some lenders or dealerships may require it as a condition of your financing.

Does GAP insurance cover repossession?

No, GAP insurance does not cover repossession. GAP applies when your vehicle is declared a total loss by your insurance company due to an accident or theft.