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What Is Gap Insurance?

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Gap insurance applies to financed vehicles and covers the difference between what you still owe in payments and what the car is worth at that moment.

Here is an example to illustrate the concept. Let’s assume you bought a new vehicle for $20,000 and made a down payment of $5,000. You pay for the difference in installments of $250 per month and have a deductible of $500. After ten months you have an accident and the car is totaled. The insurer evaluates the ten months old car to $7,500.

At the moment of the accident, you still owe $12,500 to the bank, but the collision car insurance will only cover $7,500. The gap insurance will provide the extra $5,000 (note that it won’t cover the deductible, you are responsible to pay it). If you don’t have gap insurance, the $5,000 will come out of your pocket.

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