GAP insurance on a car loan: what it covers and when it can matter
Check if your loan could be more than your car's worth, and what GAP insurance covers.
GAP insurance pays the difference between what your car insurer pays out and what you still owe on your loan if the car is written off or stolen.
A shortfall like that is more likely with a small or no deposit, a long loan term, or extras added to the loan. A shortfall is less likely with a larger deposit, a shorter loan term, or car insurance with an agreed value that would cover your loan balance.
Whether GAP suits you depends on your own circumstances. This guide is general information, not a recommendation.
- Your car is written off, and you still owe more on the loan than it's worth.
- Your car insurer pays out the car's market value.
- GAP covers the shortfall between that payout and what you still owe, up to your policy's limits.
Example only
- Loan owed: $18,000
- Insurer pays: $14,000
- Shortfall GAP can cover: $4,000
What does GAP cover?
Cars lose value. Loans take time to pay down. In the early part of a loan, you can owe more than the car is worth.
What GAP covers
If the car is written off or stolen, your comprehensive car insurer pays out what the car is worth, not what you owe. The Commerce Commission describes GAP insurance as cover for that shortfall.
In the Commission's 2021 review, GAP policies also included extra benefits, such as paying your car insurance excess. Benefits differ between insurers. Read the policy wording.
What it doesn't
GAP is not car insurance. It doesn't pay for repairs or damage to other cars. It sits on top of your comprehensive cover.
Why does GAP depend on comprehensive insurance?
A GAP claim starts with a comprehensive car insurance payout. No payout, no GAP claim. The Commerce Commission's 2021 review found that at one insurer, three out of four declined GAP claims were declined because the customer had no comprehensive policy.
- GAP generally pays only while your comprehensive cover is in force.
- Car insurance usually renews every year. GAP often runs for years. If your car policy lapses at renewal, GAP may not pay.
- Car insurers usually need to know the car is under finance.
When can a shortfall happen?
Here's how the numbers can play out on a $20,000 car. A smaller deposit, a longer term, a car that loses value faster, and extras added to the loan all mean more months where the loan balance is higher than the car's value.
Illustrative example only. Not a quote, not real customer data, and not a prediction of what your car will be worth. Your rate, term, fees and the car's value will differ.
Assumptions: car price $20,000. The loan is the price, less any deposit, plus CarPow's $510 broker fee, plus any extras shown. 14.5% p.a. fixed, monthly repayments, no balloon. Lender fees are not included. The car's value is assumed to fall at a steady rate each year: 15 per cent a year in one column, 25 per cent a year in the other.
| Example | Term | Loan (incl. $510 fee) | Total payable | Months with a shortfall, value falls 15 per cent a year | Months with a shortfall, value falls 25 per cent a year |
|---|
| No deposit (example) | 5 years | $20,510 | $28,954.20 | 19 (months 1–19). Largest estimated shortfall $619 (month 6) | 44 (months 1–44). Largest estimated shortfall $2,853 (month 20) |
| No deposit (example) | 7 years | $20,510 | $32,763.36 | 54 (months 1–54). Largest estimated shortfall $2,132 (month 25) | 74 (months 1–74). Largest estimated shortfall $5,722 (month 34) |
| $5,000 deposit | 5 years | $15,510 | $21,895.20 | None | None |
| No deposit (example), $3,000 of extras added to the loan | 5 years | $23,510 | $33,189.00 | 32 (months 1–32). Largest estimated shortfall $3,510 (month 1) | 47 (months 1–47). Largest estimated shortfall $5,163 (month 16) |
Illustrative example only, not a quote or offer. Based on a $20,000 car, a loan of $20,510 (including CarPow's $510 broker fee), 14.5% p.a. fixed, monthly repayments over 5 years: $482.57 a month, total payable $28,954.20. Other rows use the loan and total payable shown in the table. Lender fees are not included and may apply. See standard fees and charges. Interest rates range from 9.5% to 29.95% p.a. depending on the lender's assessment. Lending criteria apply. Approval not guaranteed. The car's future value is an assumption, not a prediction.
A higher rate, or a car that loses value faster, gives more months with a shortfall.
The insurer's value can also start lower than the price you paid. In the same example (no deposit, 5 years, value falling 15 per cent a year), if the insurer valued the car at 90% of the sale price from day one, there would be 30 months with a shortfall (months 1–30), and the largest estimated shortfall would be $2,519 (month 2).
Want to try your own numbers? Use our car loan shortfall calculator.
When is a shortfall less likely?
- you put down a larger deposit or trade-in
- the loan term is shorter
- you pay cash for most of the car
- your car insurance has an agreed value at or above the loan balance.
There's more on deposits in our guide to no deposit car loans.
Views on GAP differ. Consumer NZ says add-on insurance sold at car yards, including GAP, isn't worth buying.
In its 2021 review (data for the three years to March 2020, five insurers), the Commerce Commission found that claims were made on about 1% of active GAP policies, and 89% of those claims were approved.
The average GAP payout was $2,925, against an estimated average retail premium of $518. These are industry-wide figures from 2018–2020, not a guide to any current policy. Source
GAP or a higher agreed value?
Many car insurance policies pay the car's market value if it's written off. That's what the car was worth just before the loss.
Some insurers offer agreed value cover instead. You and the insurer set the car's value when you take out the policy, and again at each renewal. If the agreed value is at or above your loan balance, a shortfall may not arise.
Insurers limit how high an agreed value can go, and a higher agreed value can raise your premium.
| GAP insurance | Higher agreed value |
|---|
| What it is | A separate policy that covers a shortfall on your loan | Part of your car insurance policy |
| How long it lasts | Set by the GAP policy, often years | Set each year when your car insurance renews |
| What's paid out | The shortfall between your insurance payout and your loan balance, less any arrears | The agreed value of the car |
| Who is paid | Paid towards your loan balance | Paid under your car insurance policy. If the car is under finance, ask your insurer how the lender is paid |
| Extras | Often includes extras such as paying your excess. Benefits differ between insurers | Depends on your car insurance policy |
Ask your car insurer for both quotes so you can compare.
Is GAP compulsory with car finance?
GAP insurance is optional when you arrange finance through CarPow. A lender can only impose reasonable insurance requirements, and your loan documents will say if any insurance is a condition of your loan.
Lenders must make reasonable inquiries before arranging insurance with a loan, such as whether you already have cover. CarPow is a broker, not the lender. We also have our own obligations, including giving you accurate information.
You can buy car insurance and add-ons from other providers. You don't have to buy them from the car yard.
Can you cancel GAP?
GAP insurance policies have their own cancellation terms and cooling-off periods. The Commerce Commission's 2021 review found some insurers gave a pro-rata refund if you cancelled after that period. Check the policy wording, and ask before you buy.
If the premium was added to your loan, a refund usually reduces the loan rather than coming back to you as cash.
From 5 December 2026, for loans entered into from that date, a new law lets you cancel a repayment waiver or extended warranty offered by your lender within 5 working days of receiving the disclosure statement, unless the lender reasonably requires it. This includes lender 'GAP-style' waivers. It generally doesn't cover GAP or breakdown insurance policies from an insurer, which have their own cancellation terms. Correct as at 26 September 2026.
If you repay your loan early, the law gives a proportionate refund for some products financed under the loan, mainly loan repayment (consumer credit) insurance arranged by the lender, and repayment waivers or extended warranties provided by the lender. Refunds for GAP and breakdown insurance depend on the policy terms. Ask the lender and insurer how any refund is worked out. A refund usually reduces your loan balance rather than being paid to you in cash.
What to ask before you agree to GAP
- What exactly is paid, and to whom?
- Does it cover arrears, or my car insurance excess?
- How long does cover last compared with my loan term?
- What's the total cost, including interest, if it's added to the loan?
- How do I cancel, and how is any refund worked out?
- What happens if my comprehensive car insurance lapses?
- Do I already have cover that does the same job?
- Who is the insurer, and does the seller earn commission?
For a wider list covering every add-on, see add-ons when you buy a car on finance.
How CarPow handles insurance
Insurance is optional. If you choose any cover, before your loan documents are sent you'll confirm in your CarPow customer portal that you understand it's optional, that you've received and read the policy terms and documents, and that the cover suits your needs. The total insurance cost will be added to your loan and you'll pay interest on it. Your loan documents show the cost of each product before you sign.
Separately, a lender can make reasonable insurance a loan condition, for example comprehensive car insurance on the vehicle. Your loan documents will say if yours does.
Frequently asked questions
What does GAP insurance cover on a car loan?
If your car is written off or stolen, GAP insurance covers the shortfall between what your comprehensive car insurer pays out and what you still owe on your finance. In the Commission's 2021 review, GAP policies also included extra benefits, such as paying your car insurance excess. Benefits differ between insurers, so check the policy wording.
How does GAP insurance work with comprehensive car insurance?
GAP sits on top of your comprehensive car insurance. It generally pays only while that cover is in force, so if your car insurance lapses, a GAP claim can be declined. Car insurance usually renews every year, while GAP often runs for years.
Is GAP insurance worth it in NZ?
Views differ. Consumer NZ says add-on insurance sold at car yards, including GAP, isn't worth buying. The Commerce Commission's 2021 review (data for the three years to March 2020, five insurers) found claims were made on about 1% of active GAP policies, and 89% of those claims were approved; the average payout was $2,925 against an estimated average retail premium of $518. These figures are not current. Whether it suits you depends on your circumstances. This is general information, not a recommendation. Source
Is GAP insurance compulsory when I get car finance?
GAP insurance is optional when you arrange finance through CarPow. A lender can only impose reasonable insurance requirements, and your loan documents will say if any insurance is a condition of your loan.
How does GAP compare with raising my agreed value?
With agreed value cover, you and your car insurer set the car's value when you take out the policy and at each renewal. If that value is at or above your loan balance, a shortfall may not arise. Insurers limit how high an agreed value can go, and it can raise your premium, so ask your car insurer for both quotes.
Can I cancel GAP insurance and get a refund?
GAP insurance policies have their own cancellation terms and cooling-off periods, so check the policy wording. If the premium was added to your loan, a refund usually reduces the loan rather than coming back to you as cash. From 5 December 2026, for loans entered into from that date, a new law lets you cancel a repayment waiver or extended warranty offered by your lender within 5 working days of receiving the disclosure statement, unless the lender reasonably requires it. This includes lender 'GAP-style' waivers. It generally doesn't cover GAP or breakdown insurance policies from an insurer, which have their own cancellation terms. Correct as at 26 September 2026.
What happens to GAP if I pay my car loan off early?
If you repay your loan early, the law gives a proportionate refund for some products financed under the loan, mainly loan repayment (consumer credit) insurance arranged by the lender, and repayment waivers or extended warranties provided by the lender. Refunds for GAP and breakdown insurance depend on the policy terms. Ask the lender and insurer how any refund is worked out. A refund usually reduces your loan balance rather than being paid to you in cash.
Does GAP pay my car insurance excess?
In the Commission's 2021 review, GAP policies included extra benefits, such as paying your car insurance excess. Benefits differ between insurers, so check the policy wording.
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About this guide
Embeth Limited t/a CarPow is a registered financial service provider (FSP655251). We are a broker, not a lender. Information in this guide is general and not financial advice.
Lending criteria apply. Approval not guaranteed.
The worked examples on this page are illustrative only.
Insurance cover is subject to the policy terms, conditions and exclusions. Read the policy wording before you buy.
If you have a complaint about CarPow, please contact us first. If we can't resolve it, you can go to our free, independent dispute resolution scheme: Financial Services Complaints Ltd (FSCL), member number 7632. For a complaint about a lender or insurer, contact them first, then their dispute resolution scheme.
Correct as at 26 September 2026.
Sources
- Commerce Commission, Motor vehicle financing and add-ons review, 10 November 2021.
- Consumer Protection, Car insurance.
- Consumer Protection, Getting a loan for your car.
- Consumer NZ, Don't buy rip-off insurance products offered at car yards and Finance at car yards: what you need to know.
- Credit Contracts and Consumer Finance Amendment Act 2026, s 27A and the repayment waiver definition.
- Credit Contracts and Consumer Finance Act 2003, ss 9C, 51–53, 69 and 70, and regulation 4AB of the Credit Contracts and Consumer Finance Regulations 2004.
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