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How does gap insurance work?

What is gap insurance? I was told by my lending rep that I probably should get gap insurance on my car, but I have no idea what it's for.

avatar
Eric Schad · Updated on
Reviewed by Shannon Martin, Licensed Insurance Agent.
Gap insurance
is a product intended to lessen your financial burden if you get in an accident. It pays the difference between your car when it’s totaled and the remaining loan balance.
For example, let’s say your car is worth $22,500 when someone hits you and it’s
totaled
. But your car loan balance is currently $26,500. The car insurance company will only give you the $22,500 actual cash value, and you’d have to pay the remaining $4,000.
That difference is just what gap insurance does: it covers the gap of the $4,000 so you don’t have to.
In some cases, it’s a great investment, especially if you have a history of accidents.”
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