What Is Gap Insurance?

What Is Gap Insurance?

What Is Gap Insurance?

Quick take: What is gap insurance?

  • Gap insurance is an option for drivers who finance their vehicle.
  • It provides coverage when you owe more on your car than it’s worth.
  • Your risk decreases as your loan balance goes down.

Question I’m financing a new car for five years and my lender said I should look into gap insurance. I haven’t had this type of coverage before. Why would I need it now?

Joe Angelini, a Farmers Insurance® agent in Half Moon Bay, California, explains how gap insurance can help you when you finance a vehicle.

Answer As soon as you drive any new car off the dealer lot, it starts to go down in value. This depreciation is rapid at first — then levels off over time. When you take out a loan, you could owe more on the car than it’s worth for the first year or two of ownership. Gap insurance covers this difference in case your car is declared a total loss in an accident or other covered event like vandalism or a flood. So, if your car is worth $18,000, but you owe $20,000, gap insurance can cover the $2,000 difference. Otherwise, you will have to pay it out of pocket to your lender.

Whether gap insurance makes sense for you depends on how much you put down on the car. The smaller the down payment, the more you would want to think about getting this coverage. Once you’ve built up equity in the car — meaning it’s worth more than you owe — gap insurance may no longer make financial sense.

You may also want gap insurance when leasing a vehicle. In fact, some leasing companies require it — others sometimes provide this coverage. You can check with your lender to find out if it’s necessary or would duplicate coverage that’s already provided.

Whether you buy or lease, this coverage can help you protect yourself against owing your loan or leasing company following a total loss of your vehicle.

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