Should You Buy Gap Insurance Through Your Dealership?
Last Updated on September 14, 2023
If you are leasing or financing a vehicle, then you may need gap insurance. You can buy gap insurance through your dealership. Or, you can buy gap insurance through your ordinary insurer.
Buying gap insurance through your dealership may be convenient. However, many insurers offer gap insurance, and you could save money by bundling gap insurance with your personal auto insurance policy.
Keep reading to discover everything you need to know about the pros and cons of buying gap insurance through your dealership.
Table of Contents:
- How Gap Insurance Works
- You Can Buy Your Own Gap Insurance
- Pros and Cons of Buying Gap Insurance Through Your Dealership
- How Much Does Dealership Gap Insurance Cost?
- Gap Insurance Options
- Should I Buy Gap Insurance?
How Gap Insurance Works
Gap insurance covers the difference in value between your vehicle and the amount you owe.
If your vehicle is worth $20,000, for example, but you owe $25,000 on your vehicle loan or lease, then you have a gap of $5,000.
This gap is important after a total loss accident. After a total loss, your insurer reimburses you for the actual cash value (ACV) of your vehicle. Your insurer doesn’t care how much you owe on your loan or lease. You might receive $20,000 from your insurer even though you still owe $25,000 to your dealership. Without gap insurance, you cover this gap out of pocket.
Many dealerships, lessees, and financing companies require gap insurance. In fact, many vehicle lease payments include gap insurance. You may already have gap insurance if leasing a vehicle.
You Can Buy Your Own Gap Insurance
Even if your dealership requires gap insurance, you do not need to buy gap insurance through your dealership.
In fact, many dealerships allow you to decline gap insurance when purchasing a vehicle. You can choose to add gap insurance for added peace of mind. Or, you can drop gap insurance and take the risk.
If your insurance company offers gap insurance, it may be cheaper to bundle it with your existing auto insurance policy. You could save hundreds per year by buying your own gap insurance. Progressive and Allstate are two of the major auto insurance companies that both offer gap insurance.
Pros and Cons of Buying Gap Insurance Through Your Dealership
Depending on your situation, it may or may not be worth it to buy gap insurance through your dealership.
Generally, it’s better to buy gap insurance through your personal insurance company because it’s cheaper. CarMax, for example, offers gap insurance for an extra $30-$60 annually. Carvana also offers various coverage options at a similar price point.
Some of the pros and cons of buying gap insurance through your dealership include the following:
- May already be included with lease or loan payments
- Dealerships may cover your deductible after a claim, while an insurer will not
- Most insurers only cover gaps up to 25% of your vehicle’s value, while dealership gap insurance plans have no such limit
- Not all insurers offer gap insurance, so dealership gap insurance may be your only option
- Avoid dealing with your insurance company
- Typically more expensive than buying gap insurance through your own insurer
- Most “gaps” never exceed 25% of the vehicle’s value, which negates the advantage of buying gap insurance through your dealership
- Even if your insurer doesn’t offer gap insurance, you can buy standalone gap insurance policies from third-party providers for less than your dealership’s gap insurance
- You pay interest on your gap insurance
- You do not get premiums refunded for unused gap insurance if you cancel coverage
If you’re dealing with a total loss insurance claim, then you’re likely already making a collision or comprehensive claim, so you’re dealing with your insurer regardless
How Much Does Dealership Gap Insurance Cost?
Dealership gap insurance policies tend to be more expensive than your insurer’s gap insurance policy.
Typically, a dealership charges $500 to $1,000 for gap insurance plus interest.
In comparison, adding gap insurance to your personal auto insurance policy will cost a few extra dollars per month – typically around $25 to $50 extra per year, or around 5% to 8% of your collision and comprehensive premium.
Even if your insurer does not offer gap insurance, you can buy gap insurance through standalone third-party providers, who charge around $200.
Gap Insurance Options
Overall, you have multiple options for gap insurance. You can buy gap insurance through your dealership, get a gap waiver on your loan, or decline gap insurance entirely.
Option #1: Buy Gap Insurance from the Dealership: Your dealership may offer gap insurance as an upfront perk. It’s convenient. You pay a large upfront fee (typically $500 to $1,000, plus interest), and you get complete gap insurance coverage. Some lessees and dealerships require gap insurance when leasing a vehicle. However, most dealerships allow you to decline gap insurance when financing a vehicle.
Option #2: Add a Gap Waiver to your Loan or Lease: Some lenders, dealerships, and financing companies allow you to add a gap waiver to your loan or lease. This gap waiver functions similarly to gap insurance. It waives the gap between the value of your vehicle and the amount remaining on your loan or lease.
Option #3: Decline the Dealership’s Gap Insurance and Buy Gap Insurance From Your Insurer: You can decline the dealership’s gap insurance and buy gap insurance from your insurer. Many major insurers – but not all – offer gap insurance. By bundling gap insurance with your personal auto insurance policy, you could save money compared to your dealership’s coverage.
Option #4: Decline the Dealership’s Gap Insurance and Go Without It: Many dealerships allow you to decline gap insurance. Many leases, however, require gap insurance as part of the lease agreement. If your dealership does not require gap insurance and you are fine with the added risk, then consider dropping gap insurance and going without. Some drivers are okay with a small gap, for example, while others are comfortable with the added risk.
Should I Buy Gap Insurance?
Gap insurance may or may not be worth it. You need to consider your unique financial situation, the amount remaining on your loan or lease, your aversion to risk, and the value of your vehicle, among other factors.
Here are some of the things to consider when deciding whether or not to buy gap insurance:
Size of Down Payment: A large down payment can reduce the amount of money you owe the dealership, which makes gap insurance less useful. Large down payments lead to smaller “gaps.” If you have a small down payment, on the other hand, you could owe a larger amount to your dealership, increasing the usefulness of gap insurance.
Length of Loan or Lease: If you signed a long-term loan or lease, then it takes longer to pay off the principle of the loan. That means you have a greater chance of experiencing a total loss accident where the value of your vehicle is significantly less than what you owe.
Current Value of Vehicle: Some vehicles depreciate quickly after leaving the lot. Other vehicles hold their value. Consider the current value of your vehicle when deciding whether or not gap insurance is worth it.
Aversion to Risk & Peace of Mind: Some people are averse to risk. They would rather pay a few extra dollars per month for gap insurance for added peace of mind. Others are okay with the added risk of going without gap insurance, allowing them to comfortably decline gap insurance from their dealership and insurer.
Amount Owing on Loan or Lease: The more you owe on your loan or lease, the larger the gap could be and the more money you could owe after a total loss insurance claim. Gap insurance may be worth it within the first few months or years of owning a new vehicle. However, once you have paid off a significant amount of your loan or lease, gap insurance may no longer be worth it.
Avoid Being Doubly Covered: Some dealerships, lessees, and financing companies include gap insurance automatically. You may already pay for gap insurance as part of your monthly loan or lease payments. Check your loan or lease documentation to verify coverage. You don’t want to be doubly insured.
Final Word – Buying Gap Insurance Through the Dealership
You can buy gap insurance through your dealership. It’s a convenient and easy way to buy gap insurance.
However, you can also decline your dealership’s gap insurance and buy your own gap insurance. Dealership gap insurance is expensive, and it could add $500 to $1,000 to your loan amount.
In most cases, it’s cheaper to buy gap insurance through your personal insurance policy. For a few extra dollars per month ($25 to $50 extra per year), you can add gap insurance to your ordinary insurance policy and enjoy bundling discounts.
Contact your insurance company or check your financing paperwork to determine if gap insurance is the right choice for you.