Guide to Gap Insurance in Texas

Gap insurance covers the difference between your car’s actual cash value (ACV) and the remaining balance on your loan or lease in the event of a total loss. Even though it’s not required in Texas, it’s often wise to purchase.

Note that gap insurance doesn’t cover missed loan payments, late fees, deductibles, or damage from a previous accident.¹

Like in other states, gap insurance in Texas applies when your car is declared a total loss after a covered claim, like an accident or theft.

First, your collision or comprehensive coverage pays your vehicle’s actual cash value (ACV) at the time of the loss, minus your deductible. If that payout is less than what you still owe on your loan or lease, gap insurance helps cover the remaining balance.

For example, say you owe $24,000 on your auto loan, but after a total loss your insurer determines your car’s ACV is $19,000. If you have a $1,000 deductible, your insurer would pay $18,000. That leaves a $6,000 gap between the insurance payout and your loan balance. Gap insurance would typically cover that $6,000, so you aren’t stuck paying off a vehicle you can no longer drive.

Unlike in other states, Texas lenders cannot require you to have gap coverage. However, as the example above illustrates, it’s often wise to purchase to avoid potentially thousands of dollars of extra costs after an accident.

If you choose to purchase a gap waiver, under Texas law the dealership can charge you a maximum of 5 percent of the loan amount. For leases, the waiver is capped at 5 percent of the adjusted capitalized cost specified in your lease. For example, for a $40,000 loan, the cost of a gap waiver can be as high as $2,000.

Typically, gap insurance is cheapest as an add-on to your car insurance policy. Buying it from your car’s manufacturer, your lender, or the dealership where you purchased your car will cost hundreds of dollars more. The next-cheapest option is typically a credit union.

Given that the average cost of car insurance in Texas is $2,821 per year for full coverage, gap insurance should increase the total cost anywhere from $2,800 to $3,800. According to Texas state law, the cost of gap insurance cannot be more than 5 percent of the loan amount.

Gap insurance isn’t for everybody, but it’s required in some cases and merely recommended in others. You should get gap insurance if:

• You owe more on your auto loan than your car is worth.
• Your down payment was less than 20 percent of your car’s value when you financed it initially.
• Your loan term is 60 months or more.
• You have a luxury car that depreciates faster than other vehicles.
• You rolled over negative equity from an old loan in your new car loan.

You probably don’t need gap insurance if:

• You own your car.
• You put down 20 percent or more when you financed your vehicle.
• Your loan or lease is less than five years.
• Your car holds its value over time.

If you’ve made the decision to buy gap insurance, make sure you do it at the right time and from the right company.

When to Get It

You should get gap insurance at the beginning of your loan or lease, as in theory, you could total the car moments after leaving the dealership.

Authorized Companies

Here is a list of all the companies authorized to sell personal gap insurance in Texas:

Though it’s not required in Texas, gap insurance is typically a good idea after leasing or purchasing a new car. Gap coverage pays for the remaining loan balance in the event of a total loss, but not a new car. If available, it’s also a good idea to purchase new-car replacement, which pays for a replacement vehicle.