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What Is Gap Insurance, and Do You Need It on Your Car?

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car salesman selling gap insurance paperwork

If you plan to buy a new car soon — or recently have — there’s a chance the dealership finance officer mentioned gap insurance. It’s not a term you typically hear outside of automotive financing, so you might not be certain what gap insurance is. To clarify what it involves and why it might be necessary for you, here are the basics about gap insurance.

Covering the Basics: Everything first-time car-buyers need to know

Gap insurance and why it’s useful

Gap insurance is a special type of insurance specifically involving the value of a car and what you owe on it.

When you purchase a new car, what you owe on it in the balance of your lease could differ from what the car is actually worth. Because a vehicle’s value immediately depreciates when you drive it off the lot, it’s likely you’ll be in a situation where you owe more on a car than it’s worth. That’s generally not a problem except in a situations where, for instance, the car is totaled in an accident or stolen. Standard car insurance will only honor the value of the car, not how much you still owe on it, so it’ll be your responsibility to pay the difference — unless you have gap insurance.

Gap — which actually stands for “guaranteed asset protection” — generally costs a couple bucks a month and will pay you for whatever difference your standard auto coverage does not in pay-outs cases. It will be offered by the car dealership as part of your financing/loan package, or you can  often add it through your own existing auto insurance policy.

Gap insurance isn’t recommended for everyone, but is applicable to buyers who are paying small, interest-heavy payments over many years on the car; have put hardly any down payment on the car; or you put a lot of wear and miles on the vehicle. All of these situations will result in a high remaining principle balance and lower actual value.

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Sources: Insurance Information Institute, Nerd Wallet