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Did You Purchase GAP Insurance For Your Car? Do You Need To?

Let’s say you lease a car for $40,000 but you only put down $2,000 upfront, financing the remaining $38,000 for 60 months. About three weeks later, your car is damaged by a hit-and-run driver who was never found; now your car’s a total loss.. At the time of its wreck, your insurer values the car at $35,000, reasoning that the vehicle depreciated in value as soon as you drove it off the lot. This means that you still owe a difference of $3,000 on a totaled automobile.

This is a problem that you would not be experiencing if you had purchased guaranteed auto protection (GAP) insurance. GAP insurance would have made up the difference between your vehicle’s market value at the time of its wreck and whatever money you still owed on it. (In the case of the above-mentioned scenario, your GAP insurance would cover the remaining $3,000 on your totaled car.)

But how can you know ahead of time whether or not you should consider purchasing GAP insurance for your leased automobile?

It’s usually a good idea to purchase GAP insurance when…

  • You make a down payment of less than 20 percent
  • You finance a long-term loan (generally 60 months or more)

GAP coverage can also come in handy when you have negative equity in the car, like when you are trading in your currently leased vehicle for one of lesser value. For example, if you still owe $25,000 on your current car and want to trade down to a car worth $23,000, the difference of $2,000 can be rolled into your new loan if you have GAP coverage.

Of course, GAP coverage is not always necessary. In the following cases, you might consider yourself safe if you went without GAP coverage:

  • If you paid for your vehicle in cash
  • If the finance term for your vehicle is for 12 months or less
  • If you put 25 percent or more down on your vehicle

GAP coverage can be a generally cheap and practical purchase for your leased automobile. You can buy the coverage at the time you lease your vehicle or at a later date. Few people know to ask for this type of coverage when buying or leasing a car.

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