What is gap insurance?
Gap insurance stands for guaranteed auto protection in an accident or if your car is stolen. It protects drivers from paying out the difference between the amount you owe on your car loan and the car’s current estimated value.
Gap insurance covers the difference between what you still owe on the car and what the car insurance company says it’s worth. This amount can be significant, because vehicles can depreciate quickly.
Even so, there are expenses that gap insurance doesn’t cover. For instance, vehicle repairs or the cost of a rental car while yours is being repaired aren’t covered. It doesn’t pay for warranties, and it can’t be used to make a down payment on a new car.
Gap insurance also doesn’t cover car payments if you lose your job or experience other financial setbacks, or even if you die or become disabled. And, it doesn’t pay for any amount that remains on your car loan if your vehicle is repossessed.
Gap insurance example
Essentially, gap insurance is designed for people still paying on their car loans, and has the most impact when they haven’t had the vehicle very long and may still owe a significant amount of money.
For example, if you didn’t make a down payment, or made only a small one, you already may owe more than the car is worth as soon as you drive it off the dealer’s lot.
The same is true if you borrowed more than the actual price of the vehicle, such as borrowing additional money to cover extras such as warranties or to pay for the registration and taxes.
Any time you owe more than what the vehicle is officially worth, you could benefit from gap insurance. Insurance will only cover what the vehicle is currently worth, no matter what you paid for it, how long you’ve had it or what you still owe. That can make your out-of-pocket expenses after a car accident less.