GAP Insurance
Coverage that pays the difference between what you owe on a car loan and the vehicle's actual cash value if it is totaled or stolen.
GAP insurance (Guaranteed Asset Protection) covers the financial gap that arises when you owe more on a vehicle loan or lease than the car is worth at the time of a total loss. New cars can depreciate 15–20% in the first year; if your car is totaled shortly after purchase, the insurance payout (ACV) may be several thousand dollars less than your remaining loan balance. GAP insurance covers that difference so you are not stuck making payments on a car you no longer have.
GAP is most relevant for buyers who financed more than 80% of the vehicle's purchase price, chose long loan terms (60–84 months), are driving a high-depreciation vehicle, or are leasing. Dealers often sell GAP as a high-margin add-on; purchasing it through your auto insurer is typically 60–70% cheaper (around $20–$40 per year versus $400–$900 from the dealer).
GAP coverage is only needed while you owe more than the car is worth. Once you reach positive equity—where ACV exceeds your loan balance—GAP is unnecessary and should be dropped.
Real-World Example
Fourteen months after buying a new car with a $35,000 loan, it was totaled; the insurer paid $27,000 ACV but the loan balance was $33,000. The $6,000 GAP was covered.