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What is Gap Insurance for Cars?

Find out what gap insurance is, how it works and whether it may be worth it for you in Savvy’s handy guide.

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, updated on February 16th, 2024       

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Gap insurance is a type of coverage which can shield Australian car owners from financial losses in case of a total loss accident or theft. It covers the difference between your car's outstanding loan balance and its actual cash value at the time of the incident.

However, it’s important to understand more about this type of insurance and how it works. Learn about what gap insurance for your vehicle can do and whether it may be right for you in Savvy’s handy guide today.

What is gap insurance for cars and how does it work?

Gap insurance, also known as Guaranteed Asset Protection insurance, is a type of coverage that helps bridge the gap between the amount you owe on your car loan and the actual cash value of your vehicle, as paid out by your car insurance policy, in the event of a total loss.

When you buy a new car, its value starts depreciating the moment you drive it out of the dealership. If your car is stolen or involved in a severe accident in which it’s damaged beyond repair, your regular comprehensive or collision insurance will only cover the current market value of the car, which could be significantly lower than the outstanding loan balance.

Gap insurance steps in to cover this difference, ensuring you don't end up paying out of pocket for a car that no longer exists. It can help prevent a financial burden, especially if you have a high-interest loan or a long-term financing plan.

To understand how gap insurance works, consider the following scenario:

You buy a new car for $30,000. A year of consistent driving later, it’s declared a total loss in an accident. At that time, the actual cash value of the car may only be $24,000 due to depreciation. However, you still owe $27,000 on your car loan. If you have gap insurance, it can cover the $3,000 difference, ensuring you don't have to pay for a car you no longer have.

Is it worth having gap insurance for my car?

Whether gap insurance is worth it for you will depend on several factors, including your financial situation, the type of car you own and your car loan terms. For those buying a new car, especially one which depreciates rapidly, and who have a loan with a low deposit and/or a long repayment period, gap insurance is often seen as a valuable safety net.

Consider how much you owe on your car loan compared to its current value. If the outstanding loan amount is significantly more than the car's worth and you don’t have the savings to comfortably cover a potential shortfall, it may provide peace of mind knowing you can be covered in the event of a total loss.

However, gap insurance won’t cover everything. For example, in cases where your loan has a particularly steep rate or is worth significantly more than the payout value of the vehicle, you may not be covered for the full shortfall.

Also, if your car loan is worth close to, or less than, the market value of your vehicle, you may not need a gap insurance policy, as the payout you receive is more likely to cover the full outstanding loan debt. Because of this, before purchasing gap insurance, consider your situation closely to help you determine whether you’ll need it.

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