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What is Gap Insurance?

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Kevely Diaz

Answered On Sep 15, 2023

· Answered On Sep 15, 2023

Gap Insurance, also known as Guaranteed Auto Protection or Gap Insurance Coverage, is offered by auto insurance companies that cover the difference between the actual cash value of a vehicle and the loan balance still owed on the financing of that vehicle.

When you purchase a new car, the vehicle’s value starts to depreciate as soon as you drive it off the lot. If your car is totaled or stolen, the car’s actual cash value at the time of the incident is usually covered by standard auto insurance policies or comprehensive coverage. However, if you owe more on your auto loan or lease agreement than the car’s actual cash value, you’re responsible for paying the difference out of pocket unless you have a gap insurance policy. 

For example, if you owe $20,000 on your auto loan but your car is only worth $15,000 at the time of a total loss, your regular auto insurance would pay you $15,000, and you would owe the remaining $5,000 on your loan balance. Gap insurance would cover this “gap” of $5,000.

Gap insurance is typically optional coverage and is most beneficial to those who lease or finance new cars, have made a small percent down payment, have a car depreciating faster than average, or have a loan term of 60 months or more. It’s important to note that gap insurance is not a replacement for standard auto insurance but rather a supplement. It does not cover car repairs, rental cars, or other expenses related to an accident if the vehicle is not declared a total loss.