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What is gap insurance and what does it cover?

In the process of buying a new car and wondering 'what is GAP insurance on a car and what does it cover?'

Nicholas Hinrichsen - Published: September 25, 2020

GAP insurance is an insurance product that insures the difference between the loan value and the Actual Cash Value (ACV) of the car in the event of a total loss collision. What does this mean in plain English? Let's say you've purchase a brand new Ford F150 for $50,000, but with taxes, title, and fees the total out the door price was $55,000.

Now you drive that new car for 10 miles and then get into a major accident where the insurance company "totals" the car or declares it a total loss and offers you its fair-market value. The insurance company is going to value the vehicle as a Used (not new) F150 and based on the latest Book Values will only pay out $45,000. The "GAP" in this case is the difference between what the insurance has offered you ($45,000) and your current loan balance ($55,000) - or a total of $10,000.

Now if you didn't have GAP insurance, and wanted a NEW F150 you would still need to keep paying down the remaining $10,000 GAP. In the event you have GAP insurance, the GAP insurer will pay this $10,000 so you've effectively got 0 loan balance.

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