What Is Gap Insurance for Cars?

If you've ever shopped for a new car, you've probably heard of gap insurance. But unless it was been explained to you, you probably never purchased it. As the name implies, gap insurance is intended to bridge the gap between a vehicle's purchase price and its present value.

Significance

Gap insurance protection was created to offset the problem of instant depreciation: The second you drive a new car off the lot at the dealership, it is considered "used" and its value decreases. This causes a gap between the price you paid for the car and its value once it leaves the dealership. A general rule is, if you don't have a down payment of at least a 20 percent on your new car, you should consider gap insurance.

Types

The basic coverage protects you in case of a total loss of the vehicle. In other words, your insurance company pays only what the vehicle is worth at the time of loss, which does not necessarily mean your loan will be paid off. Gap insurance takes care of that problem, so you don't end up continuing to pay for a vehicle you no longer have. Other types of gap coverage will repay your insurance deductible, give you $1,000 toward a new vehicle or replace the car.

Protect Yourself

Your lender may include gap protection in your financing to protect its investment. However, you should make sure that it's been included, or if you prefer to get it through a different insurance company, be sure it's not included in the loan to avoid paying double premiums. Keep in mind that you are not limited to the gap insurance provider offered by the dealer. Shopping around on the Internet before your vehicle purchase can save you money.

Complete Protection

Should you decide to obtain gap insurance, make sure the coverage includes all types of loss, such as theft, natural disasters and accidents. You don't want to find out the hard way that your coverage is limited to certain incidents.

Location

Where you live and how you plan to use the vehicle can play an important part in deciding whether to obtain gap insurance. If you live in a relatively rural area and intend to use your vehicle only in limited circumstances, you may decide not to obtain gap insurance. However, the more often you drive in heavy traffic, the more important it is to protect yourself.