What is the difference between GAP and comprehensive insurance?


Actually, comprehensive insurance and GAP insurance are similar in that they cover basically the same thing - perils that will cause the car to be declared a total loss such as collision (if this is included), theft or fire. The distinction between the two is on what portion of the car's value the insurance covers.

Comprehensive insurance will pay you on the fair value of the car at the time that it was totalled. This deducts the value of depreciation of the car.

The problem with this is that if you have an existing car loan, the money you get from the comprehensive or collision insurance may not be enough.

Gap insurance can come in to close this gap (hence the name). It will cover what you still owe on your car loan. The same thing goes if you lease the car. If it gets totalled, you will have to pay the whole amount.

Here's an illustration:

You bought a car for $15,000 through a car financing program. You were asked to pay $300 as a down payment and $200 as your monthly car payments. On the third month of the loan, the car was totalled. You have only paid a total of $900 for the car.

You go to your car insurance company and after consulting the blue book, they determined that the fair market value of the car was at $13,500. So that is what they paid to you. You still owe $600 on the car. If you have gap insurance, it will handle this amount.

If you look at this example, you can say that comprehensive or collision insurance covers the car's fair market value while gap insurance covers the value of depreciation.

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