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This can cause some unwanted issues, since for most of us the value of the car depreciates faster than we can pay it off! Imagine you get your 6-month-old car into an accident and your car is totaled. Well standard insurance is likely only going to cover the current value of your car. But you'll need more than its current value to replace it. This “gap” between what the car is worth and what it will cost to repair or replace it is where gap insurance comes in. 

Gap insurance covers the difference between what your standard insurance will cover and how much is left on your loan. For example, let’s say you just got a car that was worth $25k. You’ve paid off $5k, so you have $20k in loans. Now, imagine after a year of owning this nice new car, you total it. Maybe you hit a deer, maybe the roads were icy, or maybe an uninsured driver made just the wrong decision...in your direction. Once you put in the claim with your insurance, they tell you that after depreciation, the car is only worth $19k. That means there’s an extra $1,000 that will have to come out of your pocket - unless you have gap insurance.  

Not everyone needs gap insurance. But you should consider it if your vehicle is leased, financed for longer than five years, depreciates faster than the average (such as luxury or sport vehicles), or if you made less than a 20 percent down payment when buying the car.  

While it might be disappointing to find you need yet another kind of insurance –, good news! Gap insurance can cost as little as $20 a year with most insurance policies. Gap insurance can be the difference between replacing your car after a wreck and getting stuck with lemonade after initially buying your dream car. Given how affordable it is, its cost-saving potential, and the general peace of mind it gives, we believe gap insurance to be a great idea for you and your new vehicle.