Gap insurance, explained simply

When you owe more than your car is worth, gap coverage fills the difference.

New cars lose value quickly. If yours is totaled or stolen, collision or comprehensive coverage pays its actual cash value, not what you still owe. Gap coverage pays the difference between the two, minus your deductible in most cases.

An example

You owe $24,000 on your loan. The car is totaled and its actual cash value is $19,000. Your insurer pays $19,000 minus a $500 deductible. Without gap coverage, you still owe the lender about $5,500 for a car you no longer have.

Who should consider it

You made a small down payment (under about 20%).
Your loan is 60 months or longer.
You rolled negative equity from a previous car into the loan.
You lease. Many leases include gap coverage already, so check first.

Where to buy it

Dealers, lenders and many auto insurers offer gap coverage. Insurer-provided gap is often less expensive than dealer-sold gap, but terms vary. Compare before signing.

Smart tip: gap is temporary by nature. Once your loan balance falls below the car's value, you can usually drop it.

This guide is general information from Smart Quotes Now, not insurance, legal or financial advice. Coverage rules vary by state and insurer.