Gap Insurance: Why Do You Need Cost Difference Insurance?

Gap Insurance (Guaranteed Asset Protection) is a type of car insurance that covers the difference between the amount remaining on a car loan or lease and the actual market value of the car in the event of its theft or total loss. The purchase of a car is often accompanied by rapid depreciation: according to the research company Edmunds, a new car loses about 20% of its value in the first year of use. This creates a situation where the amount owed to the bank can significantly exceed the insurance payment under a standard policy.

Let’s say a driver buys a car for $30,000, makes a minimal down payment and takes out a loan. A year later, if the vehicle is involved in an accident and found to be a total loss, the standard insurance pays out an amount equal to the current market value, such as $24,000. However, the balance on the loan could be $27,000, leaving the owner with a $3,000 debt that they will have to pay out of their own pocket. Gap Insurance takes care of this difference, protecting the car owner from financial loss.

This insurance is especially important for those who buy a car on credit with a small down payment, sign a long-term lease or choose a vehicle with high depreciation. Many car dealers and finance companies offer Gap Insurance as part of the contract, but it can also be purchased separately from insurance companies. The cost of this coverage varies, but usually ranges from $400 to $700 for the entire term of the loan or about $20 per month if you pay monthly.