What is gap insurance and when do you actually need it?

Gap insurance covers the difference between what your car is worth and what you still owe on your loan if the vehicle is totaled or stolen. Cars depreciate quickly, so if you owe $25,000 but your car is only worth $20,000 when it's destroyed, your regular insurance pays the market value and you're stuck with that $5,000 gap out of pocket. Gap insurance covers that shortfall. You actually need it when you financed a car with a small down payment, have a long loan term of 60 months or more, or bought a vehicle that depreciates faster than average. If you put down 20 percent or more and have a short loan, you likely don't need it since you'll build equity faster than the car loses value.