What does 'gap insurance' cover for auto loans or leases?

Gap insurance addresses a common problem with auto loans and leases: a new vehicle depreciates faster than the loan balance reduces, especially in the first few years. If the vehicle is totaled or stolen, the insurance pays actual cash value (ACV), but the loan balance may be higher. The difference is the 'gap' the borrower owes out of pocket. Gap insurance pays this difference. Gap coverage is available from auto dealers, lenders, and insurers (usually as an endorsement to the PAP); insurance companies typically charge less than dealers. Particularly valuable for: low or no down payment loans; long-term loans (60+ months); rolled-over negative equity from a previous vehicle; leased vehicles (often required by leases). Gap coverage is unnecessary once the loan balance falls below the vehicle's ACV; periodic review is recommended.