What is "gap insurance" and how does it function?

Gap insurance is specifically designed to cover the financial disparity that can arise when a vehicle is totaled or stolen. In such situations, standard auto insurance policies typically reimburse the insured based on the current market value of the vehicle at the time of the loss. However, if the vehicle is relatively new and the owner has outstanding financing, the market value may be less than what is owed on the loan. Gap insurance fills this "gap" by paying the difference between the insurance payout received and the remaining balance on the car loan.

This type of coverage is particularly important for individuals who have made a small down payment on a new car or those whose vehicles depreciate quickly. By providing this financial safety net, gap insurance ensures that vehicle owners are not left with a significant debt after a loss.

The other options do not accurately reflect the function and purpose of gap insurance: it does not cover the full value of a vehicle at the time of purchase, it is not limited to just repair costs, and while it is commonly associated with leased vehicles, it is not exclusively applicable to them.