“Guaranteed Auto Protection” (or GAP) insurance covers the difference between the amount that is owed on a vehicle and what the auto insurance provider will pay if the vehicle is totaled. Depending on the length of the term of the loan and the down payment amount, GAP coverage costs several hundred dollars. Interest on that amount is also paid if it is rolled into the loan. On the other hand, those comfortable assuming the risk themselves may be better off self-insuring. Otherwise, it may be possible to add GAP coverage to an existing auto policy for less than what lenders charge for stand-alone coverage. Once the loan balance comes close to the vehicle’s value, GAP coverage can be dropped.
NOTE: GAP coverage is often required when leasing a vehicle.