Gap Insurance: Is it Important to Have Before a Collision?

Whether you are buying or leasing a new car, once you drive it off the car lot, the value of the car starts to depreciate.  This was all true until the COVID pandemic.  Since the COVID pandemic, used cars have appreciated in value.  Some experts say that during the COVID pandemic, used car values appreciated by as much as 40%.  However, those days are coming to an end, and it is expected used car values will be returning to pre-pandemic levels.

So, in the typical case, used cars depreciate in value.  If you purchased or leased a new vehicle and you get in a collision and your car is totaled (meaning it would cost more money to repair than the depreciated value of your car), you could find yourself in trouble if you do not have gap insurance.

What is Gap Insurance

Gap insurance is insurance which will help pay off your automobile loan or lease if your car is totaled and you owe more than the car’s depreciated value.  For example, you paid $30,000 for your vehicle and you still owe $25,000 at the time you get into a wreck.  The damage is so severe that the insurance company says your vehicle is totaled.  However, the insurance company says the depreciated value of your vehicle is $20,000.  But you still owe $25,000.  Who is going to pay the bank the additional $5,000?  With gap insurance, it would pay the difference between what is owed and the depreciated value amount you get from the insurance company.  Without gap insurance, you will have to pay the remaining balance owed after the insurance company pays the depreciated value of the car.  The bank will want all of the money owed whether or not you still have the car.