If you owe more on your car than it's currently worth, there's coverage for that. Gap car insurance covers the difference between loan balance and car value if your car is damaged, stolen or totaled. Gap is more than what is covered; gap is also an acronym for Guaranteed Auto Protection. Gap protection is actually a debt cancellation agreement rather than an insurance policy, and it protects you from having to pay for a car you can no longer drive.
Mind the gap
Under standard auto insurance policies, insurance providers pay to repair or replace a vehicle for an amount up to the car's current value. When an auto loan is 'upside down' or has negative equity, the owner owes more than the car's current market value, thus creating a gap that regular insurance doesn't cover. Negative equity typically happens with low or no-money-down auto loans, or when a car buyer finances more than just the price of a car, such as license, registration, warranties, service plans, or negative equity on a previous vehicle. If you can't pay off the remainder of your auto loan or a lease after a total loss on your car, it negatively impacts your credit score because the financing company reports the unpaid debt to the credit bureaus.
How to cover the gap
Gap protection varies in price and coverage depending on where you obtain it. You can get it from an auto lender, an auto insurance company or online vendor. Gap coverage is typically optional, although you may have to obtain it as a condition of financing at the time of lease or purchase. If a dealer requires you to obtain it, confirm directly with the financing company and make sure it's in your contract, warns the Consumer Financial Protection Bureau.
You can pay for gap protection in installments if you get it through an insurance company. If you purchase gap protection from an auto lender, you pay an up-front lump sum which you can usually finance into your lease or loan amount. Your auto insurance provider may give you up to 30 days after purchase to add gap protection to your policy, but it's generally safer to purchase it as soon as possible, since a car accident or other loss can happen at any time.
What it costs to cover the gap
It's generally cheaper to buy gap protection from an auto insurer than an auto lender at the dealership. Adding gap coverage to an auto policy that includes collision and comprehensive coverage costs only about $20-$30 more annually, according to the Insurance Information Institute. That would make the total cost for the coverage through an insurer approximately $240. Also, as the vehicle ages, the cost of the gap coverage goes down. According to Esurance, an online insurer and Allstate Company, gap protection costs between $500 and $1,000 if purchased at the car dealership, more than twice the amount it costs through an insurance company. However, you can be reimbursed for part of the coverage premium if you sell or refinance the car before the end of your loan or lease term.