What is Gap Insurance?
Gap insurance, or Guaranteed Asset Protection, is designed to protect car owners who have financed or leased a vehicle. When a car is involved in an accident and deemed a total loss or stolen, standard auto insurance usually pays only the car’s actual cash value (ACV) at the time of the incident. However, the car’s value may have depreciated faster than the loan or lease balance, leaving the owner to pay the remaining difference. This is where gap insurance comes into play.
For example, if you owe $20,000 on your car loan, but the car’s current market value is only $15,000 at the time of an accident, your regular auto insurance will cover the $15,000. Gap insurance will then cover the remaining $5,000, ensuring you do not have to pay out of pocket for a car you no longer own.
Gap insurance is particularly beneficial for those who make a small down payment, have a long-term loan, or lease a vehicle. Without gap insurance, you might have a significant financial burden if the car is totaled or stolen before the loan or lease is fully paid off. It is essential for new car owners, especially when the vehicle’s value is likely to depreciate quickly.