Gap insurance

How the gap opens

New vehicles depreciate fastest in their early ownership, while a loan balance falls on its own schedule. For a period those two lines don't match, and the loan can exceed the vehicle's value.

A small down payment, a long loan term, or rolling negative equity from a previous vehicle all widen and lengthen that gap.

Who usually needs it

• You leased the vehicle — many leases require it
• You put little or nothing down
• You took a long loan term
• You rolled negative equity from an old loan into the new one
• The vehicle depreciates quickly

Who usually doesn't

• You paid cash — there's no loan, so no gap
• You put down a substantial deposit
• You're far enough into the loan that the balance is below the car's value
• You could comfortably cover a shortfall yourself

Where you buy it matters

Dealerships commonly sell gap coverage at the point of finance, often rolled into the loan so you pay interest on it. Many auto insurers offer it as an endorsement on your policy instead, frequently for considerably less.

It's worth pricing it through your own insurer before accepting the version offered in the finance office.

Cancel it when the gap closes

Once your loan balance drops below the vehicle's value, the coverage has nothing left to do. If you're paying for it as an endorsement, that's the point to remove it — and almost nobody remembers to.