Leasing a car instead of buying comes with a variety of benefits.
Positives include no or low down payment requirements, lower monthly payments, no long-term commitments and warranty coverage.
If you’re planning on leasing a car or have already done so, however, you may be wondering if you should buy gap insurance. The answer is, it depends.
What is gap insurance?
Guaranteed asset protection, or gap, is optional add-on car insurance coverage that can help you cover the “gap” between the amount you owe on your car and its actual cash value (ACV) in the event it is totally destroyed in a car accident.
Imagine you’ve been involved in an accident and your car has been damaged beyond repair and must be replaced. You still owe $18,000 on your car loan but the vehicle is now worth only $15,000. With gap insurance, you can cover the $3,000 difference between what you owe on your car and what it’s worth, after the deductible.
When gap insurance may be a good idea for leased cars
Like any car or SUV, leased vehicles depreciate quickly. In fact, most vehicles’ value depreciates about 20 percent in the first year of ownership, according to Allstate. Therefore, if you didn’t put much money down and you still owe a sizable amount on your total lease payment, you’ll likely owe more than the car is worth if you get into an accident. That’s especially true if the accident occurs soon after you drive off the dealer’s lot and the car hasn’t suffered as much depreciation.
It’s a good idea to compare your total cost — including taxes and anything else you rolled into the lease — to the car’s MSRP or agreed upon sales price, and see if you have a gap from the start. In the event you do, gap insurance is a good idea.
Keep in mind, however, that the gap is constantly fluctuating. The difference between what you owe and what the car’s worth shrinks as you make monthly payments and as the car depreciates. So, you definitely won’t need the coverage for your entire lease period. You may only need it for a few months, depending on how good of a deal you negotiated.
How to buy gap insurance
You may be pleasantly surprised to learn that in many leases, gap insurance is already built into the contract. Check your agreement carefully to determine whether it’s included or not. Keep in mind the term gap insurance may not be used in the contract, and a more general term such as lease coverage might be used instead.
If you don’t have gap insurance coverage built into your car-lease contract, then you may want to add it to your current auto insurance policy. You may also buy it as a one-time fee through a lender or dealership and roll that additional cost into your lease payment. In addition, you may buy it as a one-time fee through a company that specializes in selling gap insurance.
In most cases, gap insurance costs approximately 5 percent of the driver’s annual premium for comprehensive and collision insurance. So, if you pay $500 annually for comprehensive and collision coverage, you can expect your gap insurance to be about $25 a year, or a few extra dollars a month. Gap coverage, however, will likely cost more if you buy it from an auto dealer. Many dealers charge $500 to $1,000 for the add-on coverage, and often require a large down payment up front.
Although you may land lower monthly payments by leasing instead of buying a car, leasing is still an expensive financial transaction. Therefore, it can be tempting to simply forgo gap insurance if it isn’t included in your contract. However, after evaluating your lease situation, you may find that buying gap insurance is well worth the extra money as it may potentially save you thousands of dollars down the road.