FRB: Vehicle Leasing: Leasing vs. Buying: Gap Coverage

	Glossary
Leasing vs. Buying Gap Coverage

Leasing	Buying
Gap coverage is often included in lease agreements. If it is not, it can be purchased.	Gap coverage is usually not included in finance agreements, but it can be purchased.
Gap coverage. Gap coverage is an agreement by the lessor or a third party to cover the gap amount if your vehicle is stolen or totaled.	Gap coverage. Gap coverage is an agreement by the lendor or a third party to cover the gap amount if your vehicle is stolen or totaled.
Gap amount. The gap amount is typically the amount by which the early termination payoff, not including any past-due amounts, exceeds the insured value of your vehicle. If gap coverage is not included in your lease, you may be able to buy it separately. If you do, gap coverage usually has a one-time charge, or premium.	Gap amount. The gap amount is typically the amount by which the early payoff, not including any past-due amounts, exceeds the insured value of your vehicle. Gap coverage is usually not included in finance agreements, but you may be able to buy it separately. If you do, gap coverage usually has a one-time charge, or premium.
Reason for gap amount. The gap amount exists because your vehicle usually depreciates faster at the beginning of the lease than as you pay down your lease balance. Gap coverage is designed to cover the gap amount of your early termination liability if your vehicle is stolen or totaled. See the section Early Termination. However, it does not cover any capitalized cost reduction or initial fees you have paid. Nor does it cover any past-due amounts you owe under the lease or other lease amounts you are responsible for, such as personal property taxes or unpaid parking tickets. In most cases, gap coverage does not cover your insurance deductible, any insurance policy deductions for past-due premiums, excess wear and use of the vehicle, and so forth.	Reason for gap amount. The gap amount exists because your vehicle usually depreciates faster at the beginning of the loan than as you pay down your loan balance. Gap coverage is designed to cover the gap amount of your prepayment liability if your vehicle is stolen or totaled. See the section Early Termination. However, gap coverage does not reimburse you for any down payment or monthly payments you have made. It does not cover past-due amounts you owe under the finance agreement or other amounts you are responsible for, such as personal property taxes or unpaid parking tickets. In most cases, gap coverage does not cover your insurance deductible, any insurance policy deductions for past-due premiums, and so forth.
Example of gap coverage. Assume that You paid a $3,000 capitalized cost reduction at the beginning of the lease Your vehicle is stolen and the current lease payoff is $14,000 The insured value of the vehicle is $12,000 Your insurance deductible is $500 You have no other insurance policy deductions, such as for past-due premiums or excess mileage You don�t owe any other amounts. The gap amount is $2,000 ($14,000 minus $12,000). The gap amount does not include the $3,000 capitalized cost reduction you paid. The insurance proceeds to be paid to the lessor are $11,500 ($12,000 minus $500). If you have gap coverage, you will have to pay the $500 insurance deductible to the lessor to fulfill your lease early termination responsibility. If you don�t have gap coverage, you will have to pay the full $2,500.	Example of gap coverage. Assume that You paid a $3,000 down payment at the beginning of the loan Your vehicle is stolen and the current loan payoff is $14,000 The insured value of the vehicle is $12,000 Your insurance deductible is $500 You have no other insurance policy deductions, such as for past-due premiums You don�t owe any other amounts. The gap amount is $2,000 ($14,000 minus $12,000). The gap amount does not include the $3,000 down payment you paid. The insurance proceeds to be paid to the creditor are $11,500 ($12,000 minus $500). If you have gap coverage, you will have to pay the $500 insurance deductible to the creditor to fulfill your loan prepayment responsibility. If you don�t have gap coverage, you will have to pay the full $2,500.
Taxes. In states in which sales and use tax is paid at lease inception, gap coverage does not reimburse the tax you paid unless it is part of the adjusted capitalized cost. In those states, you will incur initial sales tax again when you lease a replacement vehicle.	Taxes. Gap coverage in a finance agreement does not include reimbursement to you of the sales tax you paid at vehicle purchase unless it is part of the amount you financed. You will incur sales tax again when you purchase a replacement vehicle.
Inclusion in lease agreements. Many lease agreements include gap coverage as a standard feature of the lease without a separate charge. Other leases offer gap coverage as an optional feature for an additional charge.	Inclusion in finance agreements. Because gap coverage is not typically included in finance agreements, you generally have a risk of early termination liability if the vehicle is stolen or totaled. See the section Early Termination. In finance agreements that do not include gap coverage, you may have the option of purchasing it for an additional charge.
Requirements to maintain gap coverage. Leases that include gap coverage often require you to maintain your vehicle insurance and not be in default at the time of the loss of your vehicle to receive the gap coverage.	Requirements to maintain gap coverage. Finance agreements that include gap coverage often require you to maintain your vehicle insurance and not be in default at the time of the loss of your vehicle to receive the gap coverage.
Variations in gap coverage. How the gap amount is determined may vary among states, lease agreements, or third-party providers. Procedures for documenting the loss and obtaining the gap coverage may also vary.	Variations in gap coverage. How the gap amount is determined may vary among states, finance agreements, or third-party providers. Procedures for documenting the loss and obtaining the gap coverage may also vary.

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Last update: May 5, 2003