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What is gap insurance and what does it cover?

Nicholas Hinrichsen - Published: January 15, 2021

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

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