Guaranteed Auto Protection (GAP) or loan/lease payoff coverage protects you from your car’s depreciating value if it is totaled before you pay off the remaining balance on the loan.
New vehicles depreciate a great deal in their first year. If you are involved in an accident and your vehicle is totaled your insurance policy will only pay for its actual cash value (ACV).
What this means is if you buy a car for $50,000 and you put down $5,000. Your loan amount will be $45,000. Let’s say you drive the car for 3 months paying $500 per month ($1500) and it depreciates by about $10,000. That means that the car’s ACV is only $40,000 and you’ll have managed to pay $6500 of it.
If you are in an accident and your car is wrecked beyond repair, the insurance company will only pay you $40,000 for it. That means you still owe your financial lender $3500 out-of-pocket to cover the depreciation “gap”.
GAP car insurance coverage plugs this hole and might cover your deductible as well.