GAP insurance is car insurance coverage that helps pay off your auto loan if your car is totaled or stolen and you owe more than the car's worth. GAP insurance may also be called "loan/lease gap coverage." GAP insurance helps pay the "gap" between the value of your car and what you still owe on the car.
How Does GAP Insurance Work
Here's an example of how gap insurance may work: Say you bought a brand-new car for $25,000. You still owe $20,000 on your auto loan when the car is totaled in a covered collision. Your collision coverage would pay your lender up to the totaled car's depreciated value — say it's worth $19,000. If you don't have gap insurance, you would have to pay $1,000 out of your own pocket to settle your auto loan on the totaled car. If you have gap insurance, your insurer would help pay the $1,000.