Understanding Loan / Lease Payoff Coverage for Your Vehicles

Often when you buy a new car, its value immediately depreciates as it becomes a used car. The drop in its value can be quite substantial depending on its make and model. During such a period, if the loan on the vehicle exceeds its value, you end up with an upside-down loan or lease. If your vehicle suffers damage due to theft or accident beyond repair, your auto insurance will only pay a used vehicle's worth based on its book-value. This will leave you liable for several thousand dollars to cover the gap between the owed amount and its book-value.

Loan/lease payoff coverage provides a way to cover this gap either completely or at least partially. Some companies offering the insurance also call it GAP insurance. Usually your dealer will provide quotes on loan/lease payoff coverage when you buy or lease a vehicle. Typically, you get 30 days after the purchase or lease to sign up for the coverage. Your auto insurance policy provider may or may not provide this coverage. It typically costs between $1,000 and $4,000 depending on the extent of coverage and the make and model of the vehicle. And it will usually cover your vehicle for 1-3 years.

Let us work out an example. Say you buy a new Toyota Corolla for $18,000. Immediately following the purchase, its value is estimated at $14,000. If your car gets totaled due to unfortunate circumstances in the early weeks following purchase, your insurance company will pay you only $14,000. Say you have loan payoff coverage fixed at $3,000 - you will be paid $3,000 by the provider of the coverage and you will be liable only for $1,000 out of your pocket.

Loan/lease payoff coverage may come in different flavors - it could pay a fixed amount (less than or at most equal to gap) or it may pay a percentage of the gap. The rates for loan/lease payoff coverage are usually negotiable if it is offered by your dealer. Research your vehicle's book-value and evaluate the need buying the coverage. Many drivers do fine without this coverage.