If you're leasing or financing a new/pre-owned vehicle, many lenders require you to have collision and comprehensive coverage on your vehicle insurance policy until your car is paid off. Say you bought a brand-new car for $25,000. Time goes on and you still owe $20,000 on your auto loan when the vehicle is totaled in a covered collision. Your collision coverage would pay your lender up to the totaled vehicles depreciated value — say it's worth $19,000. If you don't have gap insurance, you would have to pay $1,000 out of your own pocket to settle your auto loan on the totaled car. If you have GAP insurance, your GAP would help pay the $1,000.
If you're considering buying GAP insurance, think about how much you are going to owe on your auto loan versus the insured value of the vehicle. Would you owe more than your car is worth? Could you afford to pay the difference out of pocket if your car is totaled?
Gap insurance coverage applies when you're "upside down" on your auto loan in the event your vehicle is stolen or totaled. "Totaled" means that repair costs exceed the value of the vehicle.