The term gap insurance or gap coverage refers to a type of insurance or waiver that applies to car loans and leases that protects consumers from financial trouble if their car is stolen or destroyed before their loan or lease is paid off. The exact meaning of “GAP” is not certain but ranges from “Guaranteed Asset Protection” to “Good Ass Protection.”
In most cases, “gap protection” simply refers to the “gap” between the current market value of a vehicle and the remaining loan or lease balance, when the balance is higher than the market value.
It is common for automotive consumers who lease or buy with a loan to be “upside down” for much of the life of the financing. This means that, at any given time, they owe more on their lease or loan than the car is actually worth.
This can happen as a result of not making a large enough down payment, overpaying for a vehicle, trading in a vehicle that has a negative loan balance, or having an excessively long-term lease or loan — more than 48 months.
This is not a problem in itself, as long as the car survives being stolen or destroyed, and payments continue to be made until the normal end of the lease or loan.
The problem rears its ugly head if the vehicle is totally destroyed in an accident or is stolen before the lease or loan is completed. Auto insurance will pay for the vehicle, but only its current market value, not the amount remaining on the loan or lease.
If a lease or loan is “upside down,” the consumer without gap insurance will still owe the finance company or bank the amount of the difference — the gap — between the market value and the remaining lease or loan amount.
This difference could be thousands of dollars. Many consumers mistakenly think that the finance company or bank simply writes off and forgives this balance, or that the insurance company will somehow take care of it. Not true.
Gap insurance is the protection against such a financial disaster. It pays whatever difference remains after insurance has been paid.
Gap insurance or gap waiver typically comes with most leases, but not all. Although it usually comes free, some car finance companies are now selling it as an extra-profit option. Whether you get it free or have to purchase it , it is usually described in lease contracts as a waiver, not as insurance. It simply says that if the vehicle is destroyed or stolen, the lessee (the customer) is not responsible for any further costs, and the lease is terminated.
However, gap insurance does not come automatically with auto loans. Some dealers offer it as an option, generally priced at about $300-$500. Some, but not all, auto insurance companies offer it. Allstate is one of the leading providers of gap insurance. And some independent sources can be found by searching the Internet.
Like most insurance, you don’t need gap insurance until you need it, and then you really need it. Once you need it, and don’t have it, it’s too late to get it. Having gap protection is always a good idea.