GAP Insurance is a general asset protection policy that protects a car buying consumer from loan liability in the event of a total loss. Better explained in layman’s terms, this type of coverage covers the difference between the value of a financed vehicle and the amount owed, in the event that the vehicle is considered to be a total loss, or “totalled”.
If you buy a car through a car dealership or have it financed through your local bank, chances are that the loan officer or finance manager will offer you a GAP policy for your automobile loan. As most vehicles depreciate quickly, many auto loans have negative equity. This simply means that for a period of time after getting your auto loan, you will owe more on the vehicle than it is worth.
If the vehicle becomes stolen or is involved in a major collision, the auto insurance company (see your policy), will only pay an amount equal to the current market value of the vehicle. If more than that amount is owed to the finance company, then you as the borrower are responsible to pay the difference to the lienholder. GAP insurance pays this amount for you.
Generally speaking, GAP policies are very inexpensive and are a worthwhile investment to protect yourself from excessive financial liability to the finance company.