Gap Coverage on Auto Loans

Many people are not familiar with the term gap auto insurance unless they have leased a vehicle or bought one with very little money down. Most people have never heard of it, but it is a very important component in auto insurance any time that you end up financing a car for more than it is worth.

Gap auto insurance is insurance that basically fills the “gap” between what is owed and what the car is worth. Let’s say you purchase a car and your auto loan is for $30,000, but your car is only worth about $26,000. If your car is in an accident, or something happens to it, your auto insurance will estimate what the car is worth, which in this case would leave you with $4,000 that is unpaid.

Let’s say your deductible is $250 – now you owe $4,250. However, if you have gap insurance on your auto loan, you owe your deductible and nothing else. The auto insurance company would pay the $4,000. This is a smart insurance to get if you are leasing or upside down in your auto loan.

It used to be that you only took out gap insurance if you were leasing a car, it was a requirement from the dealers. However, now that more people are putting down less on their cars, the insurance companies thought it might be a good idea to start offering it to auto loans with high balances as well.



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