What is GAP insurance?

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Asked May 12, 2010

1 Answer


GAP insurance is a special type of car insurance. Your regular insurance covers the face value of your vehicle. As time passes, your vehicle depreciates, and then face value drops. In a situation where the car is bought under a car loan, the value will often drop faster than the loan balance. If the car is then totaled in an accident, the insurance policy would only pay for the portion of the loan value that matched the face value of the car, and you could be left owing thousands of dollars on a vehicle that has been sold for scrap.

GAP auto insurance, as the name implies, covers the gap between your car's book value and the amount left owing on your auto financing loan. If your loan balance is $7,000 but your depreciated car value is only $3,500, GAP coverage would pay the remaining $3,500 on the loan. You wouldn't gain anything from GAP insurance, but you can avoid becoming severely indebted.

Many dealerships make GAP insurance a requirement for getting a car loan, to make certain that they will get their money even if a disaster strikes. It makes good sense to have this type of coverage on any vehicle which is currently held under a loan or lien, because it limits your personal financial liability.

Answered May 12, 2010 by Anonymous

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