Gap Insurance Doesn't Cover Negative Equity

Question: Last year I bought a new Kia and was told if I purchased GAP insurance I wouldn't lose any money if I decided to trade up and the car had depreciated more than the loan value. Is this true? I finally read over my GAP insurance policy and it looks like it only covers the gap between the loan amount and the value of the vehicle in the event of an accident.

Answer: You were misled.  Gap insurance does not cover your car's depreciation (or how much you're upside-down on your car loan) if you want to “trade up” for a more expensive vehicle.

As you've now read in your policy paperwork, gap insurance works to cover the “gap” between the actual cash value (ACV) of your vehicle and the loan amount when your primary insurance company has found the vehicle to be a total loss, or if the vehicle is stolen and not recovered.

For gap insurance to kick in, your primary car insurance company must pay out the car's actual cash value under collision or comprehensive, or if someone else was at fault, ACV would be paid out under the other driver's property damage liability coverage.

If you're upside-down on your car loan (owe more than your vehicle is worth), then gap insurance ensures that you don't end up still owing your lien holder if your financed vehicle is totaled or stolen.

For instance, say you still owe $17,500 on your Kia, but it's only worth $15,000. You total it out. After your collision deductible of $500 is taken out, your lien holder would receive $14,500 from your primary insurer -- and you'd be left owing $3,000 to your lender.

When you have gap insurance on the vehicle, at least $2,500 should be taken care of by your gap insurance -- some gap policies will also cover your $500 deductible and pay out the full $3,000; others will not.