Get money-saving tips in your inbox.

Stay on top of personal finance tips from our money experts!

News & Resources

Do you need gap insurance for your new vehicle?

March 6, 2023
3 mins
A white SUV drives along a snowy road

This article has been updated from a previous version.

A new vehicle starts to lose about 25% of its value as soon as you drive it off the dealership lot, creating a gap between the car’s worth and how much money you still owe on it.

Let’s suppose your car is damaged or a total loss because of a collision or theft, and the settlement you get from your insurance provider is less than the outstanding balance on the loan. In that case, you may find yourself in what’s known as a negative equity position. That means your car is worth less than the balance on your loan.

When buying a new vehicle, auto dealerships may offer you what’s known as gap or guaranteed asset protection insurance. It’s an optional form of protection designed to safeguard your purchase from depreciation if the vehicle is stolen or totalled in a collision. Gap insurance can help you pay off your auto loan should you owe more money on it than its actual cash value.

But do you need it?

Considering that the average price of a new vehicle in Canada is around $58,478, gap insurance may make a lot of sense. Particularly, if you don’t pay a hefty down payment on it and choose to finance your vehicle over a long period of time.

When did gap insurance become common?

There was a time when the typical auto loan term was about five years. However, when automakers and dealerships started offering longer-term auto loans of up to eight years following the 2008 financial crisis, it changed how consumers buy new cars.

For automakers, the problem was that consumers wouldn’t be eager to purchase a new vehicle again for longer periods of time. The auto industry’s answer was to entice customers to come back sooner. Dealerships encouraged drivers to trade-in their vehicles before paying off their existing loans and roll the outstanding balance they owed into a new, low-interest rate loan to finance an upgrade.

Adding gap insurance to your new vehicle purchase can provide you with peace of mind if your car is wrecked beyond repair in a collision, you don’t have a limited waiver of depreciation on the policy, or if the payout you get from your insurance company isn’t enough to pay the balance on your auto loan.

It may be cheaper to ask your insurance provider to add a waiver of depreciation to your policy than buying the dealership’s gap coverage since the provider’s endorsement usually costs only a few dollars per month.

What is the difference between gap insurance and a waiver of depreciation?

Most car insurance providers in Ontario and Alberta can add an endorsement to your policy that provides the same level of coverage as gap insurance and at a lesser cost. In Ontario, that endorsement can be acquired with an Ontario Policy Change Form (OPCF) 43 — commonly known as a limited waiver of depreciation (OPCF 43A is for drivers who lease a vehicle). In Alberta, it’s referred to as a Standard Endorsement Form (SEF) 43R.

Both forms remove your insurance provider’s right to deduct depreciation from the value of your vehicle when settling a claim for loss or damage caused by theft or a collision. Usually, both endorsements only apply to new vehicles purchased within the last 24 to 48 months.

Determining whether you should buy gap insurance or add a limited waiver of deprecation to your policy comes down to dollars and cents — and the length of your auto loan financing agreement. Talk to your car insurance provider or broker about which option suits your new vehicle investment best.

If you choose to go with an endorsement from an insurance company, make sure to shop around for the lowest auto insurance rate first. That way you know you’re with the most affordable provider for you.

car mascot.png

Don't waste time calling around for auto insurance

Use RATESDOTCA to shop around, and compare multiple quotes at the same time.

Liam Lahey

Liam Lahey is a versatile marketer with experience as a staff and freelance writer for many business and technology publications and newspapers. He previously worked as the editor and media spokesperson for RATESDOTCA, handling home, auto, and travel insurance topics.

Latest auto insurance articles

Ontario’s budget 2024: Drivers will soon be be able to opt out of certain mandatory auto insurance coverage
Ontario’s 2024 budget suggests allowing previously mandatory insurance coverage to become optional. However, opting for this flexibility may potentially bring on higher risks.
4 mins read
Higher car expenses leading more Canadians to make changes to their driving
A new survey from RATESDOTCA and BNN found that 37% of Canadian drivers are planning on making changes to their driving routines in order to cut costs.
6 mins read
Why your new car's headlights cost $6,500 more than your old car's headlights
Bought a car this year? You might be paying at least 23% more for repairs. Find out why.
6 mins read

Subscribe to our newsletter

Stay on top of our latest offers, relevant news and tips!

Thanks for joining!

You'll be hearing from us shortly - stay tuned.