This is actually not a very frequently asked question, but too many car buyers end up with GAP insurance on their purchase contracts without knowing what it is.
In the event that, 1) your automobile insurance decides to pay you the value of your car rather than replace (vehicle theft) or repair (totaled) the vehicle, and 2) the value of the car (amount paid by insurance) is less than the balance of your auto loan, then there will be a remaining balance on the auto loan after all of the insurance proceeds are paid toward the loan. In this situation, GAP insurance will pay the remaining balance on the auto loan.
As with service contracts, dealers make huge profits on GAP Insurance with mark ups of 300% and more. In order to practically eliminate any need for GAP insurance, increase your downpayment and shorten the term of your financing, preferably forty-eight (48) months or less.
If you feel a need for GAP insurance, then negotiate. Dealers usually sell this insurance in the price range of about $450 to $800, depending on the price of the car. You can expect the dealer’s cost to be about 25 to 35% of that price. If you stand firm, you should be able to cut the price in half or more.