What is gap insurance on a car?

If you lease or finance your vehicle, gap insurance helps cover the gap between what you owe on your vehicle and your car’s actual cash value in the event it is stolen or totaled in an accident.  

Because car insurance companies usually only cover up to the market value of your vehicle in the case of a total loss, gap insurance protects you from being “upside-down” on your loan, owing more to your lender than your car is worth. Gap insurance on a vehicle makes the most sense when you lease or buy a brand-new car that’s less than three years old and/or put a small down payment with a longer loan or lease term. You will no longer need gap insurance when you owe less on your loan than your vehicle’s market value.