Gap insurance (which isn’t technically insurance, but more of a debt cancellation agreement) protects you if your car is stolen or totaled while the balance of your car loan is less than the value of your car. For example, if you purchase a $20,000 car with no money down, your car might depreciate in value to $15,000 as soon as you drive it off the lot.
So what happens if you’re driving along in your brand new car, having a good old time blaring your new sound system, when you make one wrong turn and *SPLASH*, you find yourself in 15 feet of water with your car rapidly filling up with water. Well, you either can try to break the window if you have a window-breaking tool nearby, or else you’ll have to calmly wait until your car is completely submerged and then you can open the door and swim to safety.
Great, you’re still alive, but your new car is sitting on the bottom of a river, and you still owe a lot of money on it. Your insurance is only going to pay you the $15,000 that your car is worth, so you’re screwed out of the $5,000 gap between the car’s value and what you still owe on it. Well, unless you have gap insurance.
Gap insurance will do just what it sounds like - it will cover the difference between what you owe your lender and what your insurance company pays you if your car is totaled. It’s usually just a one-time charge of a few hundred dollars, and it’s definitely recommended if you buy a car with little or no money down, have an extended-term loan, or if you’re purchasing a car with a very high rate of depreciation.
