Gap Insurance: What It Is and How It Can Save You Thousands

Your car gets totaled. Insurance pays you the actual cash value — what the car was worth, not what you owe. If you owe more than the car is worth, you're "upside down" and the difference comes out of your pocket.

Attorney Brad DeBry gives a real example: "My friend's daughter bought a car about a year ago. Now that the car was totaled, the value was much lower than what she owed on the loan. She's upside down."

The math: You bought a used car last year for $20,000 with a 5-year loan. You owe $17,000. The car gets totaled and actual cash value is $14,500. You're $2,500 short — that's the gap. And the at-fault driver's insurance won't pay it. They only owe you the car's value, not your loan balance.

Gap insurance covers the difference between what insurance pays (actual cash value) and what you owe on your loan. In the example above, gap insurance would pay the $2,500 shortfall.

Where it comes from: - Many new car dealers include it when you finance - Used car dealers often offer it as an add-on - Some auto insurance policies include it as optional coverage - Credit unions and banks sometimes bundle it with auto loans

DeBry's key tip: "Gather all the paperwork from when you bought your car. Occasionally gap insurance gets added on to a used car purchase without you knowing it. It's not supposed to happen, but it can. Also there's so much happening when you buy a car you may not remember that you bought gap insurance."

Check your purchase paperwork. Sometimes the gap policy is separate. Other times it's buried in an extended warranty. Either way, if you have it, it can save you thousands.

Gap insurance only kicks in after the regular insurance settlement is finalized. The higher you negotiate your actual cash value, the smaller the gap — and the less gap insurance has to cover (or the less you pay out of pocket if you don't have it).

This is why getting an independent appraisal matters even more when you're upside down:

• •Without gap insurance: Every dollar you recover above the initial offer goes directly to reducing your out-of-pocket loan shortfall
• •With gap insurance: A higher ACV settlement may mean gap insurance doesn't even need to activate

Our average client recovers $6,500 above the initial insurance offer. That's often enough to eliminate the gap entirely — with or without gap insurance.