Only a small percentage of drivers enjoy the luxury of paying cash for their cars upon purchase. They never have to worry about a loan, payment plan, or terms of a lease.
However, for many people, a lease is a good option. Some folks either don’t have the money to buy a car in full at the time of purchase, or don’t want to make the commitment to one car for a long period of time, so a lease option makes perfect sense. They simply make a down payment, and the dealership works with them on a monthly installment plan until the car is paid off—usually five years or less.
No matter which leasing route we take, it’s important to have a plan in place just in case our car gets totaled in an accident.
When leasing, remember that you don’t own our cars, the dealership does. If the car gets destroyed before the lease is up, you still owe payments on a car that doesn’t exist anymore and you’ll need a new car to drive.
Luckily, dealerships have found a solution to this problem and it’s called GAP insurance.
How It Works
Let’s say you’re in a car accident and the damage is an estimated $30,000. But, your car loan is for $35,000. That leaves a $5000 GAP that still needs to be paid. By purchasing GAP insurance, a driver’s deductible would typically be $500. They would pay that and the GAP insurance would cover the remaining $4500 balance.
GAP coverage can be bought within the first year of leasing or refinancing your car. The maximum payout for a GAP claim is $50,000. So, if you lease a car for $80,000 and still owe over $50,000, be aware that GAP will not completely cover the amount you still owe to pay off the car.
The procedure to make a GAP claim is pretty simple. Just provide the claim department with a copy of the police report you filed after the accident, and a copy of your primary insurance company’s settlement check.
GAP insurance does not replace collision or property damage insurance. It only covers the cash difference between your vehicle and the loan amount still owed on it. It will not provide rental car coverage until you can get a replacement car; make sure your primary auto insurance includes this provision.
Not all states offer GAP insurance, but most do. Any loan with an interest rate of over 12.5 percent isn’t eligible for GAP insurance.
GAP insurance can be bought through your dealership or online. Look for multiple quotes to get the best rate and terms for your contract. It’s a good idea to research coverage before you go to your dealership to purchase your car. That way you have a bargaining chip to compare against what they offer you.