Gap insurance
Coverage that pays the difference between a totaled car's value and what you still owe on the loan or lease.
Gap insurance covers the shortfall when a car is totaled or stolen while you owe more on the loan or lease than the car is worth. Without it, the insurer pays actual cash value to the lender and you owe the rest.
It matters when a financed car is wrecked early in the loan. Check whether you bought gap coverage through your insurer or dealer before deciding what to do with the damaged car, because the lien must be cleared before the vehicle can be sold or junked.
The Insurance Information Institute explains that standard policies pay a car’s current market value, that most cars lose 20 percent of their value within a year, and that gap insurance covers the difference between what the vehicle is worth and the amount still owed on it.1
References
-
Insurance Information Institute, “What is gap insurance?”, https://www.iii.org/article/what-is-gap-insurance ↩