Understanding Gap Insurance

If you are involved in an accident and your vehicle is totaled, your auto insurance company will pay the ACV, or actual cash value, of your car before it was totaled. However, the ACV of your car may not be the actual amount you owe your lender. If you had $15,000 left to pay on your loan, because of depreciation, your vehicle would only be worth $10,000 at the time it was totaled. That gap equaling $5,000 is where gap insurance comes in handy.

If you did not purchase gap insurance at the time of taking out your loan, you would be required to pay back every cent of the loan, whether or not you still own the car. Gap insurance is intended to close the gap between the ACV of your car and what you still owe on your loan. This type of insurance is very important for those of you who have several payments left of a particularly large loan. Make sure to ask about gap insurance if you have applied for a car loan.