What is gap insurance and do you need it?

Gap insurance fills the gap between what your insurance company pays for accident or theft, and what you owe on an existing car loan.

$$$$$$$ CURRENT VALUE $$$$$$$  $$ THE GAP $$
$$$$$$$$$$$$$$ LOAN AMOUNT $$$$$$$$$$$$$$$

Car insurance pays out your car’s current value. Because cars lose value quickly, you may find yourself in a situation where you owe more on loan than what the car is actually worth — for instance, you buy a $40,000 car and in one year it is valued at $32,000, but you still have $35,000 left on your loan. Gap insurance covers that $3,000 difference.

When you might need gap insurance
Consider buying gap insurance for your new car or truck purchase if you:

• Made less than a 20% down payment
• Financed for 60 months or longer
• Leased the vehicle (carrying gap insurance is generally required for a lease)
• Purchased a car that depreciates faster than the average
• Rolled over negative equity from an old car loan into the new loan

Gap insurance is an optional, add-on coverage which typically adds on around 5% of your total car insurance bill.

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