What is GAP Insurance – If your car is totaled in an accident, or stolen, your auto insurance company will give you a settlement based on the car’s actual cash value (ACV), not what you paid for it. Since cars depreciate in value quickly, your settlement may not cover what you still owe on your auto loan or lease. That could leave you with no car and a big bill to pay.

GAP insurance is an optional coverage that can be added to your collision insurance policy. It pays the difference between the balance of a lease or loan due on a vehicle and what your insurance company pays if the car is considered a covered total loss. Without proper coverage, the gap between what you’ve paid and what you owe can be substantial.

Let’s say your car cost $30,000 when new, and you currently owe $25,000. If the car is totaled, the ACV of the vehicle may be only $20,000. You have a deductible of $500, so the car accident settlement is $19,500. Your gap insurance pays the remaining $5,500 on the loan instead of having to come up with the money yourself.

You can purchase gap insurance at your dealership, though this is likely to cost you significantly more. Many dealerships sell gap insurance coverage for an average of $500 to $1,500, and they often require a large payment upfront. Alternatively, you can save hundreds by entering your zip code above and get free quotes from one or more of the carriers that provides the cheapest auto insurance coverage in your area.