How to Understand Car Gap Insurance


Finalize the sales deal on your new vehicle. For sake of explanation, say you paid $38,000 for the new vehicle. You put a down payment of $3,500, making the amount that you financed or what you still owe to be $34,500.00.


Drive your new vehicle off the dealer's lot and down the street. In your mind, you think that you just made $3,500 in equity in your car. However, in reality, the minute you drove your car off the dealer's lot, the value of your car decreased, meaning it went down in value. So, in just a few minutes time, your $38,000 auto is only actually worth $32,000 according to Kelly Blue Book or other vehicle evaluation methods. This means that you are what some car dealers refer to being "upside down" on your car. You owe $2,500 more than what the value is now declared to be.


Think what would happen if you did not have Gap Insurance on your new auto if you were suddenly in an accident, just down the street after signing the papers on your new vehicle. You would think that your insurance would pay you what you just paid for your car, so you can pay off the loan you just took out, recoup your down payment and start over with another new car. Actually, if you had proper coverage, the insurance company would probably just pay the Kelly Blue Book value, which would be about $32,000, less a deductible of anywhere from $500 to $2,500. So, you would be out a car and still owe on a car loan that you are legally obligated to pay off.


Make that very important call to your insurance company for auto Gap Insurance before you drive your car off the dealer's lot. This would make your scenario go much differently. You would still be very upset about your accident and providing that the accident was the fault of the other driver, you would have the security of the needed additional Gap Insurance. The Gap Insurance would most likely pay you for your additional losses of the difference between the sales price of $38,000 and the Kelly Blue Book value or equivalent, which could be around $32,000. This amount would be $6,000 or the "gap" between the sales price and the actual value of the vehicle. Some Gap Insurance policies will even pay for your insurance deductibles.


Consider other scenarios that Gap Insurance coverage could come in handy such as tornados, hurricanes, fire, vandalism or theft.


Ask all the questions pertaining to your new vehicles value, replacement costs, Gap Insurance limitations and about any additional fees before you finalize your new vehicle documents. Talk to the finance manager at the vehicle dealership to obtain information regarding Gap Insurance through the dealership's credit options to compare to other quotes you should obtain from your insurance agent.


Know that most all of the same coverage scenarios would apply to a new vehicle lease program.

Tips and Warnings

  • Gap Insurance is an important type of insurance to carry during the first year or two of owning or leasing your vehicle or until the car is worth more than the balance that you owe on it.