How Wrong Insurance on a Leased Car Can Put You Thousands of Dollars in Debt
Perhaps you’ve carefully considered buying a car versus leasing it, and decided to go with the lease. With a lease, you don’t need to borrow any money; you just pay a fixed monthly fee to the leasing company. Furthermore, the monthly payments on a lease are smaller than on a loan.
Unfortunately, the story is not so simple. If you are not careful, you may end up owing the leasing company thousands of dollars before you even get a chance to break in the car! Here’s how it can happen.
You lease a brand-new BMW and park in the street the first night, while clearing up some space in the garage. Unfortunately, the old tree that threatened to fall for the past year finally yielded to age, and scored a perfect hit on the beemer. The car is totaled.
Luckily, every lease requires you to carry collision and comprehensive coverage. You submit an insurance claim. The car insurance agent assesses the value of the car at $25,000 and sends the money to the leasing company. You think you are off the hook. Unfortunately, you are in for a surprise: the leasing company wants $30,000.
What happened here? The insurance pays the value of the car at the time of the accident. Unfortunately, that value is not the same as the value of the new car: the moment you drove the car off the lot, it lost 10% of its value or more. The new BMW was valued at $30,000, and thats what the leasing company wants. The insurance company correctly states that by the time you parked it near your house, it was only worth $25,000 and they are not going to give you a cent more than this valuation.
You are now personally liable for the difference between the two values, or $5,000. If you cannot pay it, you will need to arrange a loan for that amount and pay it over time, with interest.
Was there any way to avoid this scenario? Yes, but you needed to plan in advance. The so-called “gap insurance” is an auto insurance that covers the difference between the car’s current value and the amount owed to the financing or leasing company. You can usually buy gap insurance from the same company that sold you regular car insurance. Gap insurance is only valid if you carry comprehensive and collision insurance.
Gap insurance is so useful that many lease contracts make it mandatory. However, if your lease contract left this requirement out, it is highly recommended that you buy it voluntarily lest you find yourself with no car to drive and with a large loan to pay off.