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What is gap insurance?

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What is gap insurance?

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Gap protection is not really insurance, it’s a debt cancellation agreement that covers the difference (gap) between your outstanding auto loan and the amount the insurer pays you (the current market value of the car regardless of how much you owe on it) if your car is totaled. The gap refers to the negative equity that occurs when you finance all or most of a vehicle (i.e., put little or no money down) and/or it depreciates faster than you pay down the loan. 

For example, if your new car depreciates 10 percent as soon as you drive it off the lot, and then you total it a week later, your regular insurance would reimburse you only the 90 percent remaining value—not the full outstanding loan amount. Gap coverage fills (pays) that uncovered gap.

You don’t need to consider gap protection if you haven’t financed your car or if, during your loan term or lease, you will not at any point owe more than the car is worth.

If you do want gap protection, you typically can buy it through the lender that finances your auto purchase, from an online vendor, from the dealer or from your insurance company. An insurance company often will charge less than the dealer or even other sources, but you’ll have to remember to cancel the coverage when you no longer need it. Shop around, not just for price but for coverage, too. 

Some protection plans reimburse your insurance deductible, and some offer a vehicle replacement option, which pays extra to replace the car.

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