What Is Automobile Gap Insurance?

by Ben Bontekoe

Overview

If your car is totaled in an accident, your insurance company will pay you the actual cash value of your car. However, this may be less than the amount you owe on your loan, forcing you to pay the difference.
Function

Gap insurance will pay the difference (gap) between what your car is worth and the amount you still owe. This amount can be significant if your car is new.

Significance

New cars begin to depreciate as soon as they leave the showroom and can lose as much as 20 percent of their value in the first year.
Benefits

Gap insurance is very inexpensive, often costing only a few dollars a month. It is especially valuable for leased cars, where the gap is usually large.
Considerations

The longer you own your car, the more the gap decreases. When your car is worth more than you owe, you may want to think about dropping gap coverage.
Warning

While you can purchase gap insurance from your dealer, you can often get a better price through your insurance company, if it offers gap insurance.