A vehicle's value often declines much faster than a borrower's loan or lease balance. In the event that a borrower's car is wrecked or stolen and not recovered, the borrower is still responsible to pay off any outstanding balance of the financial contract. The primary insurance settlement may be several thousand dollars short of paying off the full balance of the loan or lease. This deficient amount will be difficult for the lender or lessor to collect and is often charged off.
Gap insurance covers the difference between the net payoffs of a lease or loan and the amount of settlement made by the primary insurance carrier in the event a vehicle is deemed a total loss due to physical damage or unrecovered theft.
Gap insurance is good for the lender's bottom line because without gap, a deficiency balance is typically charged off. Gap also improves customer relationships by making the borrower whole and better able to obtain a replacement vehicle in the event of a total loss. This coverage is rated on a per vehicle basis.