GAP insurance, explained

What it means

Guaranteed Asset Protection (GAP) insurance pays the difference between your loan or lease balance and your car's actual cash value if it's totaled or stolen. If you owe $28,000 but your insurer only pays $23,000 because of depreciation, GAP covers the $5,000 gap so you're not stuck making payments on a car you no longer have. Most leases require it. For financed purchases, it's optional but often pushed hard by the finance manager. Dealers charge $500 to $900 for GAP, but your own auto insurer usually offers it for $20 to $40 per year added to your existing policy.

Why it matters

New cars depreciate 20% to 30% in the first year. If you finance more than 80% of the purchase price or roll negative equity into the loan, you're underwater from day one. Without GAP, a total loss in year one or two leaves you writing a check for thousands you don't have while also needing to buy another car. Dealer GAP is cancelable for a prorated refund if you pay off early, but you'll get better value buying it through your insurer.

What to do

Call your auto insurance company before you sign anything and ask what they charge for GAP coverage. Then compare it to the dealer quote and choose the cheaper option. If you're not sure whether you need it, run your numbers through the Refinance Verdict and check the Sell or Keep Verdict to see how underwater you actually are.