Have you heard of gap insurance coverage? If not, keep reading. Let’s lay out a scenario. You finally did it. You leased your first new car. It’s new, it’s shiny and it even has that new car smell. (Is it true that they spray the smell in to the car?)

Everything is just as it should be, right? Everybody loves your new set of wheels. You’re the talk of the office.

On your way home after work, the traffic light turns green, you proceed ahead, but somebody else runs the red light and hits you. You’re T-boned and luckily, you escape uninjured. Unfortunately, your car doesn’t. It’s totaled and the person who hits you has no insurance. After only 1 week, your new car is totaled. Let’s look at why you need gap insurance coverage.

Remember that car you bought for $30,000? As soon as you drove it off the lot, it may lost 20%-30% of its value. The problem is now this: Your lease payments are based on the purchase price but your car is worth as much as 30% less than it was when you bought it. When your insurance company pays you for your car, they will pay the depreciated price of $21,000 but your lease payments are based on $30,000 plus interest.

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What you’re left with is more than $10,000 to make up the lease payments. The leasing company will not forgive this debt. Gap insurance coverage pays the gap between the least amount and the actual amount. Without out, you will be paying lease payments on a car that you no longer owe.

Gap insurance coverage is offered by all auto insurance companies. It may not be called gap insurance by your company. For example, my auto insurance companies calls this coverage, “loan/lease payoff.” The good thing about this coverage is that it’s cheap. For only $20 per year, I can get this coverage for my wife’s leased car.

Check your coverage today. If you don’t have gap insurance coverage, pay the $20 and change your coverage today. It’s well worth the small amount of money.

If you get in an car accident, you will need to know what to do. Click here to go to the elementary finance bookstore to order your copy. You can also take a look at the book in the box above.