Gap Insurance

The resale value of a new vehicle drops quickly once it is driven off the Dealer's lot. Often, this results in the new owner owing more than the vehicle is worth, or being "upside down" on the vehicle. Depending on such factors as make, model, loan terms and condition of the vehicle, it could take several years before the vehicle is worth more than what is owed on its loan. You can also be "upside down" on a leased vehicle if it is involved in an accident or stolen. This means that more is owed on the lease contract than what the insurance company will pay. Whether it's a new vehicle, used vehicle or leased vehicle, you can be upside down (owe more than the value of the vehicle and/or the insurance on the vehicle) for many reasons.

When a vehicle is repossessed or declared a total loss because of an accident while you still owe money for it, you will still owe any loan balance after deducting the proceeds from the sale or the insurance payment. Generally, vehicles sold after repossession bring very, very low prices because they are sold at wholesale auction. The lender can then pursue you for the difference between the loan amount and the amount the lender gets from auction, plus the lender's cost of repossession and sale. This amount is called a "deficiency balance." Similarly, when insurance makes payment for a total loss, the amount is often much less than what you owe.
Regardless of the reason, anytime more is owed on a vehicle than the amount available from sale or insurance, there is a "gap" between the amount owed and the amount available from the vehicle to pay the loan or lease.

Gap insurance provides financial protection for consumers when such a gap exists between the actual value of their vehicle and the amount of money owed to their lender or leasing company. It's best to avoid having a "gap" in the first place by keeping loans and leases to 3 years. If you cannot afford the payments (they do not fit into your spending plan) over 3 to 4 years, you should get a less expensive car.