What is gap insurance?

This is a question I get asked regularly, hopefully this blog will better explain the answer to this question. Gap insurance covers the difference in what your car is worth and what you may owe to a bank or lender. The best way to explain the coverage is with a real life example.

If you owe $20,000 on an existing vehicle loan, and have your car stolen or totaled, your current insurance policy may only be willing to pay $17,000 to replace it. There is a difference of $3,000 between the cars value and what your insurance company will pay. Insurance companies will look at the book value of your car, which is often much less than the loan that exists on the car. The day you drive off of the car lot with a new car, you are probably upside down on your loan (you owe more than the vehicle is worth).

In this example, if you had a loss that exceeded the cars value, you would have to either come up with the money out of pocket, or have gap insurance to cover the difference. I hope this helped answer any questions you might have. If you'd like more detail, I found this blog which shares some great information: http://www.thetaoofmakingmoney.com/2007/08/03/457.html