What is gap insurance on a car?

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When you purchase a new vehicle, your lender requires you to buy and maintain full coverage. While this insurance provides some financial protection, you still need gap insurance to avoid financial loss if your car is totaled.

Definition

Gap insurance is a coverage that pays the difference between the actual cash value of your car and your loan balance if your car is totaled in an accident.

Value

The actual cash value is the market price for which your car could have been sold if it had not been rendered a total loss. Actual cash value is calculated as of the time of the accident.

Reasoning

Gap insurance is necessary because a new car depreciates over time. The largest percentage of depreciation occurs during the first year of ownership.

Depreciation

After you purchase a new vehicle, its market value decreases over time. Typically, your loan balance is higher than the actual cash value during the first three years of ownership.

Protection

If your car is totaled, gap insurance keeps you from owing money on a car you no longer own. This makes it less difficult to purchase a replacement vehicle.

Source:

CarInsurance.com: What is Gap Insurance?

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What is gap insurance on a car?

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