Cars depreciate fast. Gap insurance covers the gap between what you owe on your loan or lease and what your car is actually worth if it is totaled or stolen.
A quick example
You buy a car for $35,000 with little money down. A year later it is totaled. The insurer pays its current value of $27,000, but you still owe $31,000. Without gap coverage, you owe $4,000 on a car you no longer have.
When you likely need it
- You made a small down payment (under 20%).
- Your loan term is long (60+ months).
- You leased the vehicle (often required).
- You bought a model that depreciates quickly.
When to skip it
- You owe less than the car is worth.
- The car is paid off.
Gap coverage is usually cheap, often $20-$60 a year through your insurer, which is far less than a dealer charges.