Understanding Loan Lease Coverage In Auto Insurance Policies

Loan/lease gap insurance is an optional auto insurance coverage that applies if your car is stolen or deemed a total loss. It covers the difference between the current value of your vehicle and the loan amount you owe on it. This type of insurance is designed for people who finance or lease their vehicles, helping them avoid a significant financial loss if their car is stolen or totaled. While it is not legally mandated, many lenders or lessors require drivers to carry it as a condition of a loan or lease.

Loan/lease payoff coverage

For example, if your vehicle is worth $12,000 and is totaled in an accident, but you owe $14,000 on your loan, your collision coverage will pay out $12,000 (minus your deductible), and your loan/lease coverage will pay out the $2,000 difference to help cover your remaining loan balance. It's important to note that loan/lease payoff coverage does not cover additional charges related to your loan or lease, such as excess mileage fees, overdue loan/lease payments, financial penalties for abnormal wear and tear, or high mileage.

While loan/lease payoff coverage is not legally required, your financing institution may require it depending on the terms of your loan or lease. It is a good option to consider if you owe more on your loan than your car is worth to protect yourself from potential financial loss.

Gap insurance vs loan/lease coverage

Gap insurance is an optional, supplemental auto insurance policy that covers the difference between the insured current value of a vehicle and the balance of a loan or lease. It is designed to work with your comprehensive and collision coverage and is useful if you have a valuable new vehicle that is either financed or leased. It is particularly useful if you have made a low down payment (or no down payment) and have a long payoff period, as you may owe more than the car's current value.

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, stolen, or deemed a total loss. It is often required for lease agreements. Some lenders may also require gap insurance for certain types of vehicles that depreciate faster, such as luxury cars.

Loan/lease coverage is another form of gap coverage. However, it usually pays a specific percentage (up to 25%) of the vehicle's actual cash value minus your deductible if your car is totalled. This type of coverage is more flexible than gap insurance, as it can be purchased at any time and does not have the same restrictions on the vehicle's age or owner. While gap insurance usually covers the full amount owed, loan/lease coverage may not cover the entire gap for higher-priced vehicles.

When is loan lease coverage useful?

Loan/lease coverage, also known as gap insurance, is useful in a number of scenarios. Firstly, it is beneficial if you owe more on your car loan than the car is currently worth. This situation can occur if you made a smaller down payment on the car, have a longer financing term, or if the car has a high depreciation rate. In these cases, loan/lease coverage can help pay off the remaining loan balance if your car is stolen or totaled.

Secondly, loan/lease coverage is useful when your financing institution requires it. While it is not legally required by any state, some lenders or leasing companies may mandate it as part of the terms of your loan or lease. This is especially true if you are leasing a car, as lessors typically require comprehensive and collision coverage to protect their assets.

Thirdly, loan/lease coverage can provide peace of mind and financial protection if your car is damaged beyond repair in a covered accident soon after purchase. This type of insurance covers the "gap" between your car's current value and how much you originally paid for it, taking into account depreciation.

Finally, loan/lease coverage is useful if you want to avoid owing more than your car is worth after an accident. While it may not cover the full loan balance, it can help you manage your debt and avoid a negative equity situation.

What does loan lease coverage not cover?

Loan/lease coverage, also known as gap insurance, is an optional auto insurance coverage that applies if your car is stolen or deemed a total loss. It covers the difference between the amount you owe on your car loan and the car's actual value. For instance, if you owe $25,000 on your loan and your car is only worth $20,000, loan/lease coverage can cover the $5,000 gap, minus your deductible.

However, it's important to note that loan/lease coverage does have its limitations and may not cover certain expenses. Here's a detailed look at what loan/lease coverage typically does not cover:

• Comprehensive or collision deductible: Loan/lease coverage does not cover your comprehensive or collision deductible. This means that you will still be responsible for paying this amount out of pocket if you need to make a claim.
• Overdue loan/lease payments: If your vehicle is stolen or totalled, loan/lease coverage will not pay for any overdue loan or lease payments that were due at the time of the loss. It is important to stay current on your payments to ensure coverage.
• Financial penalties: Financial penalties imposed for excessive loss, abnormal wear and tear, or high mileage are not typically covered by loan/lease coverage. These additional costs may be your responsibility.
• Security deposits: Loan/lease coverage does not cover security deposits that are not refunded by a lessor. If you are leasing a vehicle and do not receive your security deposit back, you will not be reimbursed through loan/lease coverage.
• Extended warranties: The cost of extended warranties is generally not covered by loan/lease coverage. This includes warranties for credit life, health, accident, or disability coverage.
• Carry-over balances: Loan/lease coverage typically excludes carry-over balances from other loans. This means that if you have existing debt from a previous vehicle or loan, it will not be covered.
• Service contracts: The cost of service contracts is not usually included in loan/lease coverage. Service contracts may provide additional maintenance or repair coverage, but you will need to pay for them separately.

It's important to carefully review the terms and conditions of your specific loan/lease coverage policy, as exclusions and limitations may vary. Understanding what is not covered can help you make informed decisions about your auto insurance and ensure you have the protection you need.

Where to get gap insurance

Gap insurance is available from a variety of sources, including car insurance companies, dealerships, and lenders. It is worth shopping around to find the best rate, as rates can vary significantly between providers.

Car Insurance Companies

Most major car insurance companies offer gap insurance, including Progressive, Nationwide, State Farm, and Allstate. It is worth checking with your current insurer to see if they offer gap insurance and how much it would cost to add it to your existing policy. If you are considering switching providers, companies like Arabella, Travelers, Liberty Mutual, The Hartford, and Kemper are all rated highly for their gap insurance offerings.

Dealerships

Dealerships typically offer gap insurance when you purchase a new car, and it can be convenient to bundle it with your financing. However, it is important to note that buying gap insurance from a dealer can be more expensive, as the cost of the coverage may be bundled into your loan amount, resulting in additional interest charges. Some dealerships may also include a cancellation period, allowing you to cancel the policy and receive a full refund if you change your mind.

Lenders

If you have taken out a loan to finance your vehicle, your lender may also offer gap insurance. Similar to dealerships, purchasing gap insurance from a lender may result in additional costs as it could be bundled into your loan amount.

Frequently asked questions