GAP insurance is the difference between the actual cash value of a vehicle and the balance still owed on the financing (car loan, lease, etc.). GAP coverage is mainly used on new and used small vehicles (cars and trucks) and heavy trucks. Some financing companies and lease contracts require it.
Gap is an acronym, meaning “guaranteed auto protection” or “guaranteed asset protection.” Its function is to provide protection in the early years, when the loan exceeds the value of the car.
How does gap insurance work? Gap insurance is an optional, add on car insurance coverage that can help certain drivers cover the “gap” between the amount they owe on the vehicle and the cash value of the car in the event of an accident.
If your down payment was less than 20%, you may owe more than your car is worth. If your car is totaled or stolen, gap insurance can help you pay off the balance of the loan.
Gap insurance is something to think about when getting car insurance. But Gap insurance doesn’t cover everything. Some examples that it doesn’t help with is repairs on your vehicle. It doesn’t reimburse any kind of a balance if your car gets repossessed. It doesn’t pay on any carry-over balances added onto your new car loan. There are many advantages of having gap insurance. Pricing does vary, but the most affordable place to get the insurance is when you sign your loan documents. At times it can be incorporated right into the purchase paperwork.