Q:

What does GAP insurance cover?

A:

Quick Answer

Guaranteed asset protection (GAP) insurance covers the amount owed on a car in the event that an accident occurs. Typically, insurance companies that declare a vehicle to be a write off only pay their clients the value of a car, and not any additional costs associated with its financing, as outlined by Allstate Insurance.

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Full Answer

When a car leaves the dealer's lot, it immediately loses some of its value. In the event of an accident that totals a car, an insurance company will pay the current market value of the car and not any difference between that amount and the amount owed on a loan, as explained by Fox Business.

With basic car insurance, this can lead to a situation where the money received from an insurance claim is less than the money owed on a loan. If a driver owes $18,000 on a vehicle loan and the insurance company determines that the current value is $16,000, that leaves a gap of $2,000 that needs to be paid on the loan. GAP insurance covers the costs of paying back the loan after the claim money is received by the financial company.

GAP insurance doesn't cover interest being charged on a loan, late payments or failure to pay back money because of financial difficulties.

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