How does gap insurance work and do I need it?

Gap insurance covers the difference between what your car is worth and what you still owe on your loan if your vehicle is totaled or stolen. For example, if you owe $25,000 on your loan but your car's market value is only $20,000, your regular insurance pays $20,000 and gap insurance covers the remaining $5,000. Without it, you'd owe that difference out of pocket. You likely need it if you made a small down payment, have a long loan term, leased your vehicle, or bought a car that depreciates quickly. If you owe more than your car is worth, gap insurance is worth considering. It's typically inexpensive, around $20-40 per year added to your existing policy, though dealers often charge much more.