GAP Insurance for a Leased Car

GAP insurance for a leased car pays the difference between what you owe on your car and what it's worth. GAP insurance rates for leased cars are often $500-$1000.

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UPDATED: Jun 26, 2020

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Here's what you need to know...

  • Gap, or “guaranteed auto protection,” insurance pays the difference between what you owe on your car and what it’s worth
  • Gap insurance coverage is designed to bridge the gap between the outstanding loan and the cash value of the vehicle
  • Shopping around for gap insurance before you buy or lease your next car will help you get the best pricing on your coverage
  • On average GAP insurance is $500-1000.

You need gap insurance for a leased car because drivers of leased vehicles often owe more money that the auto is worth. Gap, or “guaranteed auto protection,” insurance pays the difference between what you owe on your car and what it’s worth.

This is coverage you should have in place if you have decided to lease a vehicle.

To compare gap insurance quotes along with regular auto insurance quotes online just enter your zip code above. You can be off and running with your free car insurance quote comparison in no time at all!

How a car lease works

How much insurance do you need on a leased car? Leasing a vehicle is like renting it. You sign up for a set term, which may be three years in length.

The dealer calculates how much the car will be worth at the end of the lease term, and you make payments based on that value instead of its total cost.

Financing for a leased vehicle is calculated based on the difference between its capitalized cost (or original price) and the residual cost at the end of the lease term.

For example, if you leased a car that was worth $20,000 at the beginning of the term and would be worth $12,000 at the end of the term, you would be making payments on $8,000 (the difference between $20,000 and $12,000) instead of the full $20,000 if you had decided to buy the car outright.

You can choose to buy the car when your lease expires and arrange financing for the remaining $12,000 in value then.

There are other options available to you when your lease expires as well:

  • you can sell the car yourself and hopefully get more for it than the remaining value
  • you can trade it in on another vehicle that you would lease

The final option at the end of the lease term is to return the car to the dealer and walk away.

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How gap insurance works

How does gap insurance work on a leased vehicle? Can you buy gap insurance at any time? If you are in an accident that is serious enough to total the car or the car is stolen, your insurance company is not going to write you a check for what the car was worth before you took it off the dealer’s lot.

Instead, you will be compensated for the amount of the cash value of the vehicle only. Let’s look at the $20,000 car you leased in the example above. If it was stolen or you totaled it a year into the lease term, you may still owe the dealer a significant amount of money on the lease.

If you find out after the incident that the cash value is lower than the amount you owe, you are still responsible for the difference. This situation is called being “upside down” on the loan. You owe more on the asset than it is currently worth.

Gap insurance coverage is designed to bridge the gap between the outstanding loan and the cash value of the vehicle.

Types of gap coverage

How do you know if you have gap insurance on your lease? Not all car insurance companies include gap insurance in a standard auto insurance policy, but it’s a good idea to find out whether you already have coverage in place before you spend money on another insurance policy.

Some insurers will sell you a gap policy as a separate insurance product. Your insurance company may be able to add the gap coverage to your existing policy as a rider, which may be a less expensive option than to apply for a separate policy to provide this protection.

The dealership may offer this coverage to you through an arrangement it has with an insurer.

If you are told that you must buy gap insurance when you arrange your lease, you are being given false information.

You can buy gap insurance at any time during the lease period if you choose to do so.

While buying coverage when you sign your lease papers may be the most convenient way to get the protection you need, it may not be the most economical way to go.

Shopping around for gap insurance before you buy or lease your next car will help you get the best pricing on your coverage.

You will also want to find a gap policy that will pay for your main insurance policy’s deductible if your car is totaled in an accident or stolen.

If you want to explore your options for gap insurance pricing when you lease a vehicle, click on the free insurance comparison tool at the bottom of the page.

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