Leased Vehicles: Gap Insurance Essential?

GAP insurance, or Guaranteed Asset Protection insurance, is an optional extra for leased vehicles, but it is often required by lessors. GAP insurance covers the difference between the depreciated value of a car and the amount still owed on the lease. This can be especially useful for leased cars, which depreciate quickly, and can save you thousands if your car is written off in an accident.

What is GAP insurance?

GAP stands for "guaranteed asset protection" or "guaranteed auto protection". It is an optional insurance product that covers the difference between the amount you owe on your auto loan and the amount the insurance company pays if your car is stolen or totalled.

When you buy or lease a new car, the vehicle starts to depreciate in value as soon as you drive it off the lot. Most cars lose 20% of their value within the first year. Standard auto insurance policies cover the depreciated value of a car, meaning they pay the current market value of the vehicle at the time of a claim. However, in the early years of ownership, the amount of the loan may exceed the market value of the vehicle. This is where GAP insurance comes in. It covers the difference between what your standard insurance will pay and the amount you owe on the vehicle.

For example, if you total your car and your vehicle is worth $20,000, your standard insurance will pay that amount. However, if you still owe $25,000 on the car loan, GAP insurance will cover that $5,000 difference.

GAP insurance is beneficial for those who have made a low down payment, have a long lease term, or are leasing a luxury car. It is also generally required for leased vehicles.

Do I need GAP insurance on a leased vehicle?

Whether you need GAP insurance on a leased vehicle depends on your financial situation and the terms of your lease agreement. GAP insurance is not required by state law, but it may be required by your lessor. Even if it's not required, GAP insurance can provide valuable protection against financial loss in certain situations.

Guaranteed Auto Protection (GAP) insurance covers the difference between the depreciated value of a car and the remaining loan or lease amount if the car is stolen or involved in an accident and declared a total loss. This type of insurance is especially important for leased vehicles, as they can depreciate quickly, leaving you owing more than the car's current value.

You should consider purchasing GAP insurance if any of the following apply to your situation:

• You made a low down payment (less than 20%)
• You have a long-term lease
• You're leasing a luxury car or a car that depreciates quickly
• You rolled over debt from a previous loan into your current lease

If your leased vehicle is stolen or totaled, your comprehensive or collision coverage will pay out an amount equal to the vehicle's actual cash value (ACV). If this amount is not enough to cover your remaining lease payments, GAP insurance can cover the difference. It's important to note that GAP insurance only applies when the amount owed is greater than the ACV, and it does not cover miscellaneous expenses like lease penalties or mileage overages.

Where can I buy GAP insurance?

You can purchase GAP insurance from your car dealership, lender, or auto insurance company. It is often included in lease agreements and added to your monthly lease payments. However, adding GAP coverage to your existing auto insurance policy may be more cost-effective.

GAP insurance is worth considering if you owe more on your lease than your car is worth. It provides financial protection and peace of mind, especially if you've made a small down payment, have a long-term lease, or lease a car that depreciates quickly. However, if you've already paid off most of your lease, made a significant down payment, or could cover the gap yourself, GAP insurance may not be necessary.

When is GAP insurance useful?

GAP insurance is useful when a vehicle is declared a total loss or is stolen. GAP insurance covers the difference between the depreciated value of the car and the loan amount owed. It is useful for those who have not made a down payment or have chosen a long payoff period, as they may owe more than the car's current value. GAP insurance is also useful for those who have a long lease term, have leased a luxury car, or have a low down payment. Additionally, it is beneficial for those who have a very long loan term or a high-interest rate, or for cars that depreciate quickly. GAP insurance can provide financial security and help save money in the event of a total loss.

GAP insurance is useful in the following scenarios:

• No down payment: If you have not made a down payment on your vehicle, you may owe more than the car's current value. In this case, GAP insurance can help cover the difference between the depreciated value and the loan amount owed.
• Long payoff period: If you have chosen a long payoff period for your loan, you may owe more than the car's current value. GAP insurance can help protect you from financial loss in this situation.
• Long lease term: If you have a long-term lease, GAP insurance can provide financial protection in case of a total loss or theft of the vehicle.
• Luxury car lease: Leasing a luxury car often involves high costs. GAP insurance can help cover the financial gap in case of any incidents.
• Low down payment: If you have made a low down payment, you may benefit from GAP insurance as it can help cover the difference between the insurance payout and the loan amount owed.
• Very long loan term or high-interest rate: GAP insurance can be useful if you have a very long loan term or a high-interest rate, as it can help minimize financial losses.
• Quick depreciation: Some cars depreciate faster than others. If you own a car that loses value quickly, GAP insurance can help protect you from financial loss.

How does GAP insurance work?

GAP insurance (Guaranteed Asset Protection) is an optional product that covers the difference between the amount you owe on your auto loan and the amount your insurance company pays out if your car is stolen or totalled. It is intended to cover the loss suffered if your loan balance is higher than the value of the vehicle.

GAP insurance is offered by dealers when purchasing or leasing a car. The cost of the product is rolled into the loan amount. However, it is not mandatory to purchase GAP insurance from the dealer. You can also buy it from your auto insurance company or a direct lender. It is important to compare prices and coverage before purchasing.

GAP insurance covers the difference between the depreciated value of the car and the loan amount owed if the car is involved in an accident. It is especially useful if you have made no down payment and have chosen a long payoff period, as you may owe more than the car's current value. GAP insurance can also be beneficial for leased cars as they depreciate quickly.

GAP insurance will pay out when a car is declared a total loss and there is a difference between what your main insurer will pay out and the lease/loan balance for the vehicle. It covers the shortfall so that you are financially protected.

You can add GAP insurance to your comprehensive auto insurance policy. Check with your auto insurance company to see if they can add it to your existing policy.

How do I get GAP insurance?

If you're considering getting Guaranteed Auto Protection (GAP) insurance, it's likely because you're leasing or financing a vehicle. GAP insurance is an optional coverage that applies if your car is stolen or deemed a total loss. It covers the difference between the vehicle's actual cash value (ACV) and the outstanding balance on a loan or lease.

There are a few ways to get GAP insurance:

• Through your auto insurance company: The easiest and probably the cheapest way is to ask your auto insurance provider if they can add it to your existing policy.
• From a car dealership: Dealerships typically charge a flat rate of $400 to $700 for GAP insurance, which can be convenient but may not be the most cost-effective option.
• Through your lender: You can also get GAP insurance from your lender, and the cost will be included in the total amount you finance with the loan.
• From a bank or credit union: Some banks and credit unions also offer GAP insurance, with prices as low as $200 through some credit unions.

When deciding where to get GAP insurance, it's a good idea to shop around and compare prices. Additionally, keep in mind that you'll need comprehensive and collision coverage on your policy to qualify for GAP insurance.

Frequently asked questions