Guaranteed Auto Protection Insurance (GAP)

Guaranteed Auto Protection or GAP insurance or loan/lease payoff coverage is essentially insurance that protects you from depreciation if your car is wrecked or totaled before you can pay off the loan.

Since new vehicles depreciate dramatically in the first year you own one, if you are involved in an accident and your vehicle is damaged beyond repair (totaled) your insurance policy will only pay for the actual cash value (ACV) of the car.

What this essentially means is if you buy a car for $50,000 and you put down $5000, you will have to take out a loan for $45,000. Let's say you drive the car for 8 months paying $500 per month ($4000) and it depreciates by about $15,000. That means that the car's ACV is only $35,000 and you'll have managed to pay for $9000 of it. If at that point you are in an accident and your car is wrecked beyond repair, the insurance company will only pay you $35,000 for it. That means you still owe your financial lender $6000 out-of-pocket to cover the "gap" caused by depreciation.

GAP insurance plugs this hole and may even cover your deductible as well.