Gap insurance is insurance you buy when you purchase a car and it covers the difference between the value of the car and what you owe to the bank on the car.  It’s great insurance to have if you owe a lot of money on your car.  They way it even comes into play is if you’re in a car accident and your car is totaled, the responsible party’s insurance company is only obligated to pay you for the “market value” of the car. 

EXAMPLE: If you have a car that is totaled in an accident and the car is only worth $10,000, that’s all the responsible party’s insurance company is obligated to pay you.  But the problem is if you owe the bank $12,000at the time. You are then “under water”—you owe the bank more than the car is worth and more than you are going to receive in the insurance settlement.

Gap insurance fills in that gap and pays that $2,000 for you.  However, you don’t need this insurance if you don’t owe very much on your car.  If your car is worth $10,000 and you only owe $8,000, you don’t need to have gap insurance.

Overall, gap insurance is definitely something that’s good to have and it’s not very expensive.  The time to buy this type of insurance is when you buy your car. There’s nothing worse than being in a wreck that is not your fault but still owing money on the car that you don’t have anymore.