What is gap insurance and why do I need it?

You’ve probably heard the sad but true fact that once you drive a car off the lot that it has depreciated considerably. What that means to you is that, from the first moment you take possession of your brand new car, there’s a very good likelihood that it isn’t worth what you owe on it. Don’t believe it? Read on…

Say you take out a loan for $45,000 to buy a new top-of-the-line-with-all-the-bells-and-whistles SUV. You drive it off the lot; hit the highway and – BAM – get into an accident. You walk away without a scratch, fortunately, but your brand new SUV is totaled. Guess what? Your car insurance company is only going to pay you the actual cash value of that SUV. Is it $45,000? No, and it’s also probably not as close as you would like. But the bank doesn’t want to hear that; they just want their $45,000 back. So, you’re going to have to fork over the difference between the actual value (which the insurance company decides) and the bank’s loan balance.

Here’s where GAP insurance comes in. GAP insurance is an additional insurance policy that you would get to cover the difference between the cash value and the outstanding balance of your car loan or lease. Your regular auto insurer may offer GAP, but even if they don’t, it can be purchased as a separate policy by a different insurer. Some (but not all) GAP policies also pay the deductible on your regular car insurance, so that’s something you should ask about. There are also plenty of other restrictions (it is insurance, after all, and you know how they are), so make sure you read the fine print and ask lots of questions.