What does "gap insurance" provide?

Gap insurance is specifically designed to cover the difference between what a car is worth at the time it is totaled and the outstanding balance on the loan or lease for that vehicle. In many cases, vehicles depreciate quickly, and if an individual finances or leases a car, they may owe more than the car's current market value. If the vehicle is declared a total loss due to an accident or theft, gap insurance ensures that the borrower is not financially burdened by the remaining amount owed on the vehicle loan after the insurance payout for the totaled vehicle is received.

This type of insurance is particularly beneficial for those who have made a small down payment or who are leasing a vehicle, as they may be at greater risk of owing more than the vehicle is worth. Understanding this coverage can help individuals make informed decisions about their auto insurance needs when purchasing or leasing a vehicle.