Gap insurance covers the difference between what your totaled or stolen car is worth and what you still owe on the loan or lease. It matters most when you’re "upside down" — owing more than the car’s value.
Cars depreciate faster than loans amortize — which means for the first years of a typical auto loan, you often owe more than the car is worth. If it’s totaled or stolen then, standard insurance pays actual value, leaving you paying the remainder of a loan on a car you no longer have. Gap insurance covers that difference. It matters most with small down payments, long loan terms, fast-depreciating vehicles, and leases (where it’s often required or built in). Once the loan drops below the car’s value, the gap closes and you can typically drop it.
Coverage is similar, but dealers often charge more and roll it into the loan (so you pay interest on it). Adding it to your auto policy is usually cheaper.
Once your loan balance drops below the car’s actual value, the gap no longer exists — you can typically remove the coverage and stop paying for it.
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