How Gap Insurance Works
When your vehicle is in an accident, you expect your insurance to repay you for the value of the vehicle. What we don’t realize is that the current value of the vehicle is different from the value of the vehicle when it was purchased. Let’s say you started a lease for a vehicle worth $30k. Years later you get into an accident and total the vehicle. That vehicle is no longer worth $30k, but you still owe the dealership that money or whatever your lease agreement states about your monthly payments in relation to the car’s worth.
This is where gap insurance helps. They will pay the difference in the value of the car when you leased it and the actual value of the car at the time of the accident. If you don’t have gap insurance, you will be personally liable for the difference in value.
However, gap insurance isn’t always necessary.
When you might need gap insurance
Gap insurance is almost always a good idea, but sometimes it’s necessary. Here are the top situations where you should have gap insurance.
- You made less than a 20% down payment
- You’re financing for 60 months or longer
- Purchased a vehicle that depreciates faster than the average
- Rolled over negative equity from an old car loan into the new loan
In the case of a lease, you always want gap insurance. It’s so important many dealerships actually require the insurance. If you want to make sure you don’t lose money when engaging in mandatory gap insurance, put as much money down as possible.
By paying a high down payment, you absorb the loss in value from the beginning. This will result in lower lease payments.
When You Don’t Need Gap Insurance
You don’t always need gap insurance. Like the example above, once you have paid a certain amount as a down payment you don’t have to worry about a gap between the actual value and the value of your lease vs. the value when the vehicle was leased.
The only other time you don’t have to worry about gap insurance is when your dealerships make it mandatory. If that’s the case you don’t have to make a decision about whether or not to get the insurance. But, if you know you don’t want it, you may have to shop around from a dealership that doesn’t make it mandatory.
Where you can get gap insurance
You can get gap coverage from your insurer or the dealership. Just know that it typically costs a lot more at dealerships and yours may ask you to pay it all upfront.
Additionally, many insurance companies will offer a variant of gap insurance called loan/lease coverage. It’s usually less expensive than gap insurance, but it provides a certain percentage of your car’s actual cash value, which may or may not be enough, depending on how much you still owe.
Not all gap insurance is created equal. Chances are getting gap insurance from your insurance company will be cheaper and more flexible. Our advice is to always get gap insurance when you lease a vehicle, and if the price is too much, try negotiating a better deal.
If you have any further questions about gap insurance please contact us at carvoy.com