What Is Gap Insurance?
Gap insurance is a type of auto insurance that car owners can purchase to protect themselves against losses that can arise when the amount of compensation received from a total loss does not fully cover the amount the insured owes on the vehicle's financing or lease agreement. **You've taken out a car loan with a long term (more than 60 months):** A long-term loan takes longer than usual to hit the break-even point, which is when your loan balance and the car's value begin to equalize. **You bought a car with bad resale value:** If you bought a car that quickly loses value, you'd probably be upside down without a substantial down payment. It may be several years before the loan amount and the car's actual value amount begin to balance. **You've traded in an upside-down car:** The faster you rack up the miles, the faster you depreciate your car's value, and it's likely that you'll be dropping the value of your car more quickly than your payments can keep pace.
Breaking Down Gap Insurance
As an example of gap insurance at work, consider John's car, which is worth $15,000. However, he still owes a total of $20,000 worth of car payments. If John's car is completely written off as a result of an accident or theft, John's car insurance policy will reimburse him with $15,000. Because John owes the car financing company $20,000, however, he will still be $5,000 short, even though he no longer has a car.
If John purchases gap insurance, the gap insurance policy would cover the $5,000 "gap," or the difference between the money received from reimbursement and the amount still owed on the car.
Situations for Gap Insurance
Related terms:
Auto Insurance
Auto insurance is purchased by vehicle owners to mitigate costs associated with getting into an auto accident. Discover more about it here. read more
Blue Book
The Blue Book or Kelley Blue Book lists new and used car prices, helping car buyers determine the fair market value and trade-in value of automobiles. read more
Book Value : Formula & Calculation
An asset's book value is equal to its carrying value on the balance sheet, and companies calculate it by netting the asset against its accumulated depreciation. read more
Capitalized Cost Reduction
Capitalized cost reduction is any upfront payment that reduces the cost of financing. Capitalized cost reduction is generally associated with the purchase of a home or automobile. read more
Closed-End Lease
A closed-end lease is a type of rental agreement that does not require the lessee to purchase the asset at the end of the lease. read more
What Is Comprehensive Insurance?
Comprehensive insurance is car insurance that covers damage to your car from causes other than a collision. Learn about comprehensive insurance costs. read more
Contractors' All Risks (CAR) Insurance
Contractors' all risks (CAR) insurance covers contractors for both damage to the property and third-party injury or damage claims. read more
Dealer Financing
Dealer financing refers to loans originated by a retailer that are sold to a bank or other third-party institutions. read more
Down Payment
A down payment is a sum of money the buyer pays at the outset of a large transaction, such as for a home or car, often before financing the rest. read more