How Does Loan/Lease Gap Insurance Work?

Like many New England drivers, you may have borrowed money from a lender when buying or leasing your vehicles. By doing so, there may now be a gap between what you owe on one or more of your cars and what your vehicle is actually worth. For example, if you were in an accident today and your car was totaled, your insurance company should reimburse you for the current market value of your car. However, there may be a difference – or a gap – between this amount from your insurer and what you may still owe your lender. The Fred C. Church team wants to help you understand the potential impact of this gap on your wallet. We also want to share information that will help you determine whether to add a Loan/Lease Gap endorsement to a current or new auto insurance policy.

How does a down payment of less than 20% affect a loan/lease gap?

You may already know that making a down payment of at least 20% on a new or used vehicle generally means you will get more favorable terms from a lender. However, what is less broadly understood, is how putting down this amount, or more, at the time of a car purchase or lease, may leave you in a better financial situation in the event you or another driver in the household totals the vehicle. This is because the greater your investment in your vehicle prior to an accident, the smaller the gap should be between the market value of your car on that day – which is what your insurance provider should reimburse – and what you owe the lender.

However, if you choose to put down less than 20% on your new vehicle, then this gap could be more significant at the time of a crash. For this reason, you may want to consider adding Loan/Lease Gap Insurance coverage to your auto insurance policy. By having this endorsement in place at the time of an accident, the potentially large gap between what you still owe on your loan and the market value of your vehicle should be covered.

Will the financing terms you select impact the loan/lease gap?

With increasingly more car buyers investing in sophisticated but costlier vehicles, monthly loan payments are hitting all-time highs. Drivers that choose an extended length loan, one that spreads car payments out over a longer period of time, should be aware of the disadvantages. Opting for a loan term longer than 60 months can put you severely underwater, meaning you may always owe more on your car than it is worth on any given day.

For example, if you were to total your car in an accident, you will owe your lender the difference between what your insurance company will pay for the car’s market value on that day and what remains of your loan balance. Depending on how far along you are in your loan or lease term, this could add up to thousands of dollars, unless, of course, you have Loan/Lease Gap Insurance to cover this gap.

Even if you bought your car months ago, and you are just now finding out about this insurance option, you can still give us a call to discuss your options. Loan/Lease Gap Insurance is generally very flexible, and we should be able to find an excellent option to enhance your current auto insurance policy.

Does a car’s depreciation rate have an influence on the loan/lease gap?

One piece of information that is critical to know before you buy a vehicle is its rate of depreciation. The value of a new car can drop by more than 20 percent after the first 12 months of ownership, and then depreciate another 10 percent annually for the next several years. This means that a new car might be worth as little as 40 percent of its original purchase price after just five years.

No matter how much your car has depreciated in value since you drove it off the lot, there is always the risk you will owe more to the lender than your vehicle is worth at the time of an accident. But, there’s a much higher likelihood that this will be the case if your vehicle’s rate of depreciation is above average because the faster your car loses value, the more likely it is that you will have a significant loan/lease gap on any given day.

At Fred C. Church, we suggest reviewing the vehicle depreciation stats on sites like Kelley Blue Book, along with all the other information you can find there, whenever you or someone in your family is in the market for a new car.

Are you considering adding Loan/Lease Gap Insurance?

There are many things that drivers look forward to when purchasing or leasing a new vehicle. However, one thing we know you would rather not experience is a major accident that damages your car beyond repair. At Fred C. Church, we hope you never experience such an event. However, we want you to know that if that day comes, our team of claims specialists will do their very best to help the claims process move along as quickly and fairly as possible.

In addition, to protect yourself against the financial impact of a car accident, we strongly encourage you to consider adding a variety of optional and powerful endorsements to your auto insurance policy, including Loan/Lease Gap Insurance, Accident Forgiveness, and Disappearing Deductible. If any of these coverage choices seem like smart investments to you, then please give us a call. We can easily add them to your policy today if you are eligible, and potentially reduce the unpleasant consequences of a car accident in the future.