Gap insurance, which stands for “Guaranteed Asset Protection” insurance, is a type of auto insurance coverage designed to cover the “gap” between the amount owed on a vehicle loan or lease and the vehicle’s actual cash value (ACV) in the event of a total loss. This situation typically arises when a car is stolen or damaged beyond repair, and the payout from a standard auto insurance policy is less than the outstanding balance on the loan or lease.
When a vehicle is purchased using financing or through a leasing agreement, the rate of depreciation can often outpace the rate of the loan balance reduction, especially in the initial years. If the car is totaled or stolen, standard auto insurance policies only reimburse the owner for the ACV of the vehicle at the time of the incident, which may not be sufficient to pay off the remaining loan or lease balance. This leaves the owner with a financial “gap” and the responsibility to cover the difference out of pocket.
Gap insurance is specifically designed to cover this difference, ensuring that in the event of a total loss, the policyholder is not left with a significant financial burden on top of the loss of their vehicle. It is particularly recommended for individuals who finance the purchase of a new car with a small down payment, have a high-interest rate on their loan, or have a lease with high mileage limits, as these factors can increase the likelihood of a gap occurring. It is typically offered at the time of purchase through auto dealerships, finance companies, or as an add-on to a standard auto insurance policy.