Gap Insurance: What You Need To Know

You’ve just been involved in a car accident and your vehicle has been totaled. The last thing you want to be stressing over is wondering how much you’ll need to shell out to pay for repairs or even a new car.

Getting into a major automobile accident is never pleasant to think about. However, life is unpredictable, and even the best drivers aren’t completely safe from the hazards of driving.

That’s why knowing all the safety nets available to you, such as gap insurance, is important so you won’t need to stress about surprise expenses that are out of your control.

businesswoman with contract

What Is Gap Insurance?

Having gap insurance ensures that the bank doesn’t need to rely on you to cover the gap that may exist between what your insurance covers, and what you still owe on the lease in the event that your leased vehicle is totalled beyond repair.

In the event your leased vehicle gets totaled, your auto insurance will usually only pay the bank what’s called the car’s current actual cash value (ACV). That’s where gap insurance kicks in. Since cars depreciate in value very quickly, this amount will not always be in line with what is still owed on the car.

This makes sure that the entire cost of the vehicle will be covered, which is important to the bank or lender that owns the vehicle, thus protecting their asset. It also means that the outstanding balance you may owe on the car doesn’t fall on you.

Gap insurance is required to lease any vehicle and all automakers except Toyota include it in your leasing costs and contract. Toyota will typically charge about an extra $200 to include gap insurance when leasing that brand new ride.

That is why it’s very important to understand what exactly you’re paying for in your lease contract.

2019 Honda Civic lease NJ

When Does Gap Insurance Come Into Play?

Being that it’s often more simple to visualize an actual scenario to understand something as dull as an insurance policy, here’s an example of when gap insurance comes into play:

Let’s say you’re involved in an auto accident and are not found at fault.

The MSRP of your car, let’s say a 2019 Honda Civic Sport (pictured above), was about $25,000 when you signed for the vehicle and you also shelled out $2,000 as a down payment at signing.

18 months on your 36-month lease have passed and there are about 10,000 miles on the vehicle when your vehicle is involved in an accident and is deemed totaled. Taking into account natural depreciation, your insurance assesses your car’s current value to be about $18,000 when it was totaled.

The bank receives the $18,000 from the insurance and already has the $2,000 you put down on the car. Now, unfortunately, you won’t be able to get back the $2,000 you put down, but with gap insurance, you won’t have to pay the other $5,000 that is stilled owed on the car.

This also provides peace of mind to the bank because not everyone can just afford to dish out $5,000 at the drop of a dime, leaving the bank without the full value of their asset. Knowing they’re fully covered in this scenario is why this insurance is required for all lease deals and is strongly recommended if you’re financing a new vehicle.

Is Gap Insurance Right for You?

If you’re leasing, you don’t really have an option, as gap insurance is required for any car that is leased.

However, if you’re financing your vehicle, there are a few scenarios in which you would most likely be better off purchasing gap insurance.

According to the Insurance Information Institute, these situations include:

  • If you put down less than 20% on your down payment
  • If you’re financing a vehicle for 60 months or more
  • Or if you own a vehicle that depreciates very quickly compared to others

If any of those scenarios apply to you, we would definitely recommend purchasing gap insurance for your vehicle. If not, you might have to shell out thousands of dollars as shown in the example above.

Conclusion

Gap insurance is an extremely important policy to know about, especially if you’re financing a vehicle.

At Capital Motor Cars, we know that understanding all the costs associated with leasing or financing is difficult. There are a lot of moving pieces and new car shopping is often a stressful experience, especially for those doing it for the first time.

That is why we have a team of dedicated automotive experts that can assist you with any questions you might have in regards to gap insurance or even finding the perfect car for you.

Also, be sure to check out our blog for money-saving leasing tips and our latest and greatest monthly deals!

Act now to capitalize on our monthly lease specials and secure an unbeatable price. Contact us today to ride off in the car of your dreams!

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