Will Gap Insurance Cover a Car That Has Been Repossessed?

Gap insurance offers no coverage for the money you owe on your car loan after repossession. The coverage offers financial protection for totaled vehicles when an insurance payoff does not cover a loan or lease amount. If your vehicle is repossessed, you must make arrangements to pay your remaining debt to avoid being sued by your lender.

You can purchase a gap insurance policy at the time you purchase your vehicle. Costs range from $100 in states that cap the cost and profit for providers, up to $600 or more in states that do not. Gap insurance covers your loan balance in the event that your insurance company determines your vehicle a total loss, whether from damages or theft. Your insurance company pays your lender only for the vehicle's market value without regard to your total loan balance. Gap insurance pays your remaining loan balance.

You should purchase gap insurance if you lease a vehicle or borrow a loan that's higher than your vehicle's market value. If a leased vehicle becomes a total loss, you are responsible for the car's total value, not just the lease amount. If you carry over a previous loan balance to your new car loan or fail to offer enough down payment to create vehicle equity, gap insurance is advisable. Without gap insurance, you must satisfy the remainder of your loan, even if you no longer have your vehicle. Your auto loan or lease remains as an open account on your credit report, which affects other loan opportunities.

Gap insurance does not apply to repossessed vehicles. Expect to receive a bill from your lender stating the amount you owe toward your loan. Once your car is repossessed, your lender prepares it for resale and sells it either privately or at auction. Once the vehicle is sold, the bank will send you documentation of the car's selling price. If the sales price is not enough to pay off your loan balance and repossession fees, you must pay the amount due. If the sales price is more than your loan balance, you'll receive a refund after the bank collects its fees and loan payoff amount.

Expect to pay your lender for the balance remaining on your vehicle's loan amount after the sale. You can work out a payment arrangement with your lender to satisfy the balance due on your loan. If you fail to pay your lender, it can pursue legal action. Your lender can garnish your wages to collect payment. A vehicle repossession remains on your credit report for at least seven years, even if you pay the balance due.