Gap auto insurance primarily covers the difference between the value of a vehicle and what is owed on a loan when a car is totaled. For example, if someone owes $10,000 and the total loss insurance benefit is $8,500, gap insurance covers the remaining $1,500 of the loan balance.
The main reason to buy gap insurance is to protect against a financial hit when someone is upside-down on a loan. It is common for someone to be in this position early after a car purchase because vehicles often depreciate at a faster rate than the loan can be paid off. Many dealerships offer gap insurance to people at the point of purchase, though insurance providers in the broader market also offer policies. If someone doesn't buy gap insurance and suffers a total loss while under water on a loan, the owner is normally responsible for paying the difference to satisfy the loan obligation.
There are some common misconceptions about what gap insurance covers. Gap insurance has nothing to do with picking up the slack when someone loses a job or faces financial hardship. It doesn't pay off a loan when a vehicle is repossessed for delinquency, and it doesn't cover rental car costs when the vehicle is getting repaired.