Gap insurance, also known as loan/lease payoff coverage, is a type of car insurance that covers the difference between the actual value of a vehicle and the amount owed on a car loan or lease. Gap insurance is typically used when a car is financed or leased and the borrower has made a down payment or has a trade-in value that is less than the amount owed on the loan or lease.
For example, if you finance a car for $20,000 and make a down payment of $5,000, you will still owe $15,000 on the loan. If the value of the car decreases over time (for example, due to normal wear and tear or an accident), the actual value of the car may be less than the amount you owe on the loan. If this happens, gap insurance can cover the difference between the actual value of the car and the amount you owe, helping to protect you from financial loss.
Gap insurance is typically optional, and it is usually offered by car dealerships or lenders when a car is financed or leased. It is generally more expensive than other types of car insurance, such as liability or collision coverage. Gap insurance may be a good option for individuals who have a high-interest loan or lease, who have made a small down payment, or who are at high risk of losing value on their car due to depreciation or an accident.