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The Curious Bag
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Gap insurance is a special type of car insurance that prevents you from having to pay your lender extra if your car is totaled. It covers the difference between your car's value and the amount you owe, a common problem when you buy or lease a new car.
Depreciation
The value of your car lowers over time, but the rate of depreciation is highest early in your car's life. A new car often will be worth a few thousand dollars less just a month after purchasing it.
Example
Say your new car was $25,000, your down payment was $1,000 and a bank lent you $24,000. A week later, your car was totaled and your insurance company assessed its value at $22,500, paying that amount to your bank. Gap insurance would pay the $1,500 remaining on your loan for you.
Down Payment
Gap insurance is especially important if you make little or no down payment on your vehicle. In this case, you will likely owe more than your car is worth for the first couple of years.
Leasing
Many lease contracts will already include gap insurance, so check before purchasing a separate gap insurance policy.
Cost
Typically, gap insurance is a one-time payment of anywhere from about $300 to $500.
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