New cars depreciate at a very rapid value and this depreciation can put you in a risky situation when you are the owner. Gap insurance is a type of insurance product that is designed to protect you against this depreciation risk. It is available for those buying new cars as well as those who lease.
Depreciation of Cars
When you buy or lease a new car, you might be surprised at how quickly the value of the car depreciates when you drive it off the lot. It could potentially depreciate thousands of dollars within a very short period of time after purchase. During this stage of your car ownership, you might owe much more than what the car is currently worth. If you are in a wreck, your auto insurance will pay what the car is worth in the open market. This could put you in a situation where you have to pay more than what the insurance company pays if you total the car.
Gap Insurance
To overcome this potential problem of depreciation, you have the option to buy gap insurance when you finance a new vehicle. The gap insurance is usually provided directly by the company who finances the car purchase or lease for you. If you wreck your car and the insurance company does not pay for the total amount of what you owe, the gap insurance will kick in and pay the difference. This keeps you from going upside down on your auto lease.
Lease Requirements
When you lease a new car, you might be required to buy gap insurance. Most leases require you to carry collision and comprehensive insurance on your new vehicle. When you buy gap insurance, it will usually only pay when you already have collision insurance on the car. Since the auto dealer is technically the one who still owns the car, it may require you to buy this kind of insurance so that both you and the dealer are protected from the extra liability after a wreck.
Payment
When you get gap insurance for your lease, it will add something to the total cost of your monthly payment. Generally, the gap insurance is simply bundled in with your payment, and you will not have to make a separate payment to the insurance company. This insurance coverage is generally inexpensive for the benefit that it provides you. It may add to your payment by $40 or less, depending on the value of your car at the time of the purchase.
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