What is Gap Insurance and How Can It Help You?

Gap insurance is a type of supplemental insurance that covers the difference between what a vehicle is currently worth and what you owe on your car loan in the case of an accident in which your car is seriously damaged or completely destroyed. This type of insurance is especially beneficial if you bought a car whose value depreciates quickly and you have a loan for a large amount. Gap insurance coverage bridges the gap between what you owe on your car loan and what your car is actually worth. When purchasing a new car, some dealers may automatically add provisional insurance to your loan; however, you can decline this coverage.

With this agreement, you pay interest on the cost of your provisional insurance for the life of the loan, which makes it much more expensive. Your Gap insurance money may be returned if you cancel your car insurance, depending on the terms of your policy. Not all uncovered insurance policies cover negative capital, so be sure to buy a policy that does if you added negative capital to your new car loan. Some insurers with temporary coverage may cover the full balance of the loan, including the negative capital incorporated into your new car loan. If you finance or lease a vehicle, this depreciation leaves a gap between what you owe and the value of the car.

Read the information that comes with a Gap product for banks or dealers to learn how to get help if you need it. And while supplemental insurance is optional, some lenders and leasing companies may require you to take out it. In order to qualify for gap insurance, comprehensive coverage and collision coverage must be included in your policy. Whether you need supplemental insurance depends on how much you have left in your car loan or lease and the value of the vehicle. To avoid paying interest for it, NerdWallet recommends buying gap coverage through your auto insurer rather than at a dealership.

Insurance companies won't pay a gap insurance claim if your vehicle is damaged, but if it's repairable, it only covers wrecked cars. If you think your gap insurance isn't paying enough for a claim, talk to your company before accepting the settlement.