Does Gap Insurance Cover Repossession?

Gap insurance is a special type of automobile insurance. As with automobile insurance in general, gap coverage is designed to provide compensation for a loss related to your car. If you are unable to make loan payments on your car according to the terms of your loan or lease, you may face repossession. Gap insurance would not address this situation


When you owe more on a car than it’s worth, you are considered upside down in your loan. If your car is totaled, regular auto insurance will only cover the market value of your car. If you are upside down in your loan, after the insurance settlement, you could still owe a sizable balance. The purpose of gap insurance is to cover the difference between the market value of your car and the loan balance.


Gap insurance may be appropriate if you buy or lease a newer vehicle with a small down payment. Longer term loans may need gap coverage because you are more likely to be upside down in your loan. Also, gap coverage should be considered if you trade a car with an existing upside-down loan for another car and include the balance due in the new loan. However, if you make a large down payment and finance for a short period, you may not need gap coverage


When you fail to meet the terms of your auto loan or lease, your lender has the legal right to repossess (take ownership of) your car. Your loan agreement is a legal contract that gives a lender this right. The most common reason for repossession is failure to make timely payments. However, your contract may contain other reasons for repossession, such as failure to maintain insurance. When your loan is in default according to your agreement, your lender can take your car at any time without advance notice.

Preventing Repossession

Preventing repossession starts with understanding the terms of your loan agreement. If you realize you will not be able to meet the terms of the agreement, contact your lender immediately. Your lender may be willing to modify the terms of your loan. Also, enlisting the services of a nonprofit consumer credit counseling agency to help you renegotiate your loan with your lender may help.