Rachael Brennan has been working in the insurance industry since 2006 when she began working as a licensed insurance representative for 21st Century Insurance, during which time she earned her Property and Casualty license in all 50 states. After several years she expanded her insurance expertise, earning her license in Health and AD&D insurance as well. She has worked for small health in...

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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Reviewed by Jeffrey Johnson
Insurance Lawyer Jeffrey Johnson

UPDATED: Apr 14, 2022

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Here's what you need to know...

  • Whenever you file a claim for damage to your vehicle, the insurance company will pay up to the car’s Actual Cash Value for repairs or for vehicle replacement
  • If the cost of repairs exceeds the car’s value, the car will be declared a total loss. When you have a total loss claim, the carrier will only cut a check for the Actual Cash Value of the car and estimated sales tax, title fees and registration fees for your replacement car
  • Just like new cars, used cars depreciate as they age. While a used car has already gone through the initial depreciation stage where value goes down by 20 percent in the first year, the rate of depreciation is still high in the following years
  • If you finance a used car, it’s your responsibility to pay the loan off even if the car is totaled in a loss and the check doesn’t cover the entire loan balance
  • Buying GAP insurance can help protect you from having a balance on your loan after a total loss claim. It makes sense to carry GAP when you don’t put anything down on your loan or when you have a high interest rate

Many prospective car buyers see the value in buying their cars used. Pre-owned cars often include all of the latest amenities that consumers want at a discounted sticker price.

Not only can you find a quality car for less, you can rest assured that the dealer has done a thorough inspection to spot potential issues and fix them.

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While used vehicles do still depreciate, they don’t depreciate at nearly as fast of a rate as new cars. Since cars that are used have the potential of having mechanical issues, lenders tend to charge a higher interest rate to approve used car loans because of the added risk.

If you would like to protect yourself from the risk of having to pay on your vehicle after it’s totaled, here’s what you should know about GAP coverage:

Why does depreciation matter?

If you’re pricing the cost to insure a vehicle that you’re interested in, never forget to think about how depreciation could affect your level of protection.

If you’re paying all cash for your vehicle, you don’t necessarily need to worry about having a total loss and owing a finance company money.

If you’re financing a used car, on the other hand, depreciation can have a major effect on your financial future. Auto insurance companies don’t pay you the exact amount of money that you need to buy a new car like the one that you owned.

Instead, the company will pay you a dollar amount that represents the replacement cost of your vehicle minus depreciation. This dollar amount is called the Actual Cash Value (ACV).

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How fast do used cars really depreciate?

Auto experts stress that new cars drop in value by one-tenth of their value 1 minute after you sign the bill of sale. While this is true, many consumers fail to recognize that used cars also depreciate in value.

In fact, the only real difference between a new car and used car is the 20 percent depreciation rate that happens in the first year.

If you are curious to learn about the rate of depreciation for a used car based on its age, you should do your research. Not all cars depreciate at the same rate, but most cars follow the same trend based on their mileage, condition, and age.

Here is how cars depreciate after years two through five:

  • At the end of the second year, the car will depreciate by 31 percent of new car value
  • At the end of the third year, the car will depreciate by 42 percent of new car value
  • At the end of the fourth year, the car will depreciate by 51 percent of new car value
  • At the end of the fifth year, the car will depreciate by 60 percent of new car value

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What happens if you owe more than your car’s ACV?

If you finance a used car, it’s important to assess what that car is worth in the eyes of your insurer. Insurance companies use different valuation guides through the National Automotive Dealership Association and Kelley Blue Book.

They might also use sales listings and dealer sales reports to value your vehicle.

If you happen to finance more than the vehicle is worth, there’s a good chance you’ll be stuck paying off your loan without help from your insurer if the car is totaled.

Your carrier will still pay the Actual Cash Value of your car if you have physical damage coverage, but the balance of the loan that’s left is your responsibility.

What is GAP insurance?


GAP insurance is an acronym for Guaranteed Auto Protection.

This is a supplemental form of coverage that you can add to your loan or your insurance policy to help you pay off your auto loan if you owe more than the car is worth at the time of a loss. Instead of having to cut a check for the remaining balance, your insurer will do it for you.

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When do you need GAP on a used car?

You don’t always need to buy GAP insurance when you’re financing a used car. There are a few scenarios where buying GAP insurance will definitely pay off.

You never know if you’ll have a serious loss, but if you do, you’ll want GAP coverage when:

  • You put little to nothing down when financing a used car
  • You have poor credit and you have a high-interest rate. Most of your payments will go to interest rather than principal
  • You took out a long-term loan with a term longer than four years
  • You had negative equity in another vehicle that you’ve rolled into your new loan
  • You have qualified for a high-risk loan where the interest is front-loaded instead of being equally divided into each of your payments

You can purchase GAP coverage through the dealer or your insurance carrier that insures the vehicle.

It’s not always worth the extra premium, but if you are in one of the situations above, having coverage can pay off. If you want to price the cost for GAP, use an online rate comparison and compare several companies at once.

Enter your zip code below to access multiple car insurance quotes from companies in your area!