Gap Insurance

A type of car insurance that protects you in case you have a car loan and your car is totaled. This insurance covers the gap between what you owe for the car and what your insurance company would pay you for damages. It's mostly needed because cars lose value so quickly that you might end up owing more on the car than the car is actually worth.

Example

Jim's car is stolen by a bunch of people who joyride it and crash it. The hooligans! Jim still owes $12,000 for the car loan he took out last year to pay for his car. His insurance company says that his beloved heap of metal is worth only $10,000 and that's all they'll pay for his totaled wreck. Not only does Jim need a new car, but he still has to cough up the $2,000 difference. Let's hope he has gap insurance—that would pay for the 2G. One less thing for Jim to worry about.