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.

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Eric Schad
Answered on Jul 21, 2021
Eric Schad has been a freelance writer for nearly a decade, as well as an SEO specialist and editor for the past five years. Before getting behind the keyboard, he worked in the finance and music industries (the perfect combo). With a wide array of professional and personal experiences, he’s developed a knack for tone and branding across many different verticals. Away from the computer, Schad is a blues guitar shredder, crazed sports fan, and always down for a spontaneous trip anywhere around the globe.
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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