Gap insurance, or Guaranteed Asset Protection insurance, is an optional coverage typically offered for vehicles. It covers the "gap" between the current market value of your car and the amount you owe on your auto loan or lease.

New vehicles quickly lose value, which means that in the early years of ownership, your car's market value may be significantly less than the outstanding loan or lease balance. Gap insurance covers this depreciation gap.

Gap insurance is useful in situations where your car is totaled, stolen, or damaged beyond repair, and your regular auto insurance company deems it a total loss.

If you financed your vehicle with a loan, gap insurance pays the difference between your auto insurance settlement (actual cash value) and the remaining loan balance.

For leased vehicles, gap insurance covers the difference between the insurance payout and the remaining lease payments. It prevents you from being responsible for the full lease term if your car is declared a total loss.

Gap insurance can be structured in various ways. It can be a one-time payment when you purchase your vehicle, a monthly premium, or included in your auto loan/lease contract. Be sure to understand how your coverage is structured.

Gap insurance doesn't cover deductibles, late loan or lease payments, extended warranties, or other non-vehicle-related expenses. It's focused on the financial gap between your car's value and your outstanding balance.

If you want gap insurance is right for you then consider the depreciation rate of your vehicle, the size of your loan or lease, and the cost of the coverage. Especially valuable for new cars with high depreciation rates or long loan terms.