Dear Driving for Dollars,
I’m getting a great deal on leasing a new car with a monthly payment based on a price that is slightly below the car’s invoice. I’ve read your articles, so I know it’s better to roll the down payment into the monthly lease payment because I’ll never see that money again if the car is totaled early in my lease. But I’m also going to roll in the taxes, title and other fees. Do I need to buy gap insurance to cover myself?
By rolling all the costs associated with the car into the monthly lease payment, it is certainly possible that you would owe more than the car was worth if you experienced a total loss soon after your lease began. Gap insurance — insurance which bridges the gap between what a car is worth and what you owe at the time of the loss — would provide you the protection you are seeking. However, you may not need to buy it.
In many leases, gap insurance is built into the contract, so check your agreement carefully to determine whether it is included in yours. 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 or purchase it separately. A general rule of thumb is that a car loses about 10 percent of its Manufacturer’s Suggested Retail Price the moment you drive it off the lot. So compare your total cost — including taxes and everything you rolled into the lease — to the car’s MSRP, and see if you have a “gap” from the start.
Keep in mind that the “gap” is constantly fluctuating as you make your 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 a deal you negotiated.
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