Gap insurance, or Guaranteed Asset Protection insurance, is an optional auto insurance coverage designed to cover the difference between what you owe on your car loan or lease and the actual cash value (depreciated value) of your vehicle if it is totaled or stolen and not recovered

. When you buy or lease a new car, it typically depreciates quickly, often losing 20% or more of its value within the first year. Standard auto insurance policies will pay only the current market value of the vehicle at the time of a claim, which may be less than what you still owe on your loan. Gap insurance bridges this "gap" by paying the remaining balance on your loan or lease after your primary insurance payout, minus any deductible

. Gap insurance is especially useful for:

• Vehicles purchased with low down payments
• Loans with high interest rates
• Long-term loans (60 months or more)
• New cars that depreciate rapidly

There are two main ways to obtain gap coverage: through an insurance policy sold by a broker or as a waiver agreement sold by a finance manager at a dealership. The coverage is generally similar, but the insurance policy is regulated while the waiver agreement is not

. In summary, gap insurance protects you financially if your car is totaled or stolen by covering the difference between your loan balance and your insurance payout, helping you avoid paying out of pocket to settle your auto loan