Before understanding GAP insurance, you should first understand the concept of depreciation. Depreciation is the value your vehicle naturally loses over time due to age, use, and wear. For a relatable example, a pizza might be worth $20 when you first buy it. Over time, the pizza gets partially consumed and begins the natural process of decay. After a week, you’d be hard-pressed to find someone willing to pay $20 for your stale, half-eaten pizza because its value has significantly depreciated. While people don’t typically eat their cars, new vehicles do experience automatic depreciation when they are sold as they are suddenly considered pre-owned.
When your new car depreciates during its very short transition from brand new to pre-owned, a “gap” is created between the amount you owe on your new car from Atzenhoffer and the price you could sell your now-used car for. If you had the misfortune of getting into an accident that completely totaled your vehicle, your insurance company would only cover the actual depreciated value of your vehicle. As a result, you could be left paying thousands of dollars for a vehicle you can no longer drive. GAP, or “Guaranteed Asset Protection,” insurance is a policy you can purchase to cover the difference between your vehicle’s value and your loan balance.