Gap Insurance

Coverage for the difference between a totaled car actual cash value and the remaining loan or lease balance.

Overview

New cars depreciate fast, often 20 percent in the first year, while down payments are small and loan terms stretch to 72 and 84 months, so borrowers can owe thousands more than insurers pay, which the gap policy erases. Dealers and lenders sell it as a lump add on that is frequently overpriced, while auto insurers sell it for a few dollars a month attached to comprehensive and collision coverage. Some credit union loans and leases include equivalent waivers. Gap pays only the shortfall: it does not cover overdue payments, negative equity rolled into the deal, or the deductible in many forms. Once equity turns positive the coverage has nothing to insure.