Why Do We Need Gap Insurance?

Instead of discussing my personal experience with this type of insurance I think it would be best to explain what gap insurance is all about. Well, here is an example:

Let’s say you were paying off a lease on your car and the contract for the lease was for three years. Now let’s say that four months into the contract your car gets stolen and you file an insurance claim. Your insurance will pay for the amount that the car was worth at the time it was stolen, but the problem is that over the course of four months it would have most certainly gone down in value (depreciated) faster.

Your insurance company will only reimburse you for the current value of the car which would be significantly less than the amount that you still owe on the lease. The difference between the amount that will be repaid by your auto insurer and the amount that you still owe on the lease is the ‘gap’.

To illustrate further, let’s say that your leased car was initially valued for $30,000, with a $1,500 down payment and a payment of $375 a month. When you get to that fourth month you have essentially paid $3,000 for the car. However, the value of the car will probably have fallen much further, meaning it may only be worth $22,500, a difference of $4,500. Guess what? You are responsible for the difference—a huge chunk of cash!

Personally, I don’t know of many people who have that amount of money on hand. Gap insurance takes care of the problem, paying off the $4,500 gap in your regular auto insurance policy.

Gap insurance isn’t just for leased vehicles only; it can come in useful if you purchased the car and your bank is holding the note. You know just as well as I do that banks are unforgiving when it comes to money owed to them.

Gap insurance is certainly something not many people consider when it comes to leasing a car and that’s because it is not often thought to being important when people are looking for a brand new car. They may feel that having their car stolen or crashing a car is not going to happen to them, therefore when the gap bill is sent out they are shocked when it is presented to them.

So the next time you go out and look for a new lease (or purchase a new car) make sure that you also look around for a gap insurance deal because you could find yourself owing a lot of money to your leasing company or bank if the car is stolen or totaled in a crash.

---

Ryan Toms is a keen internet marketer representing a gap insurance company. Gap insurance is certainly something that many people do not think of when going after a new lease vehicle.

Photo Credit: Jason Conlon