DEFINITION of 'Gap Amount'
Insurance will only cover a certain amount of coverage if leased items are stolen or totaled. There is often a difference between the amount the insurance company covers and the amount of the vehicle that is owed under the lease agreement, because of the way lease agreements are structured.
Gap amount is the portion of a leased item's value that is not covered by insurance, in the event of a total loss from an accident or theft. Its calculation is based on the terms of the lease's early termination payoff provision. To protect against losing money because of the gap amount, consumers can purchase gap insurance.
BREAKING DOWN 'Gap Amount'
The lease payments at the beginning of the lease term do not fully cover the vehicle's depreciation, because vehicles depreciate in value more quickly when they are newer and because a consumer's vehicle lease payments are flat amounts paid monthly over a period of several years.
For example, a consumer might lease a $25,000 car for three years. It might depreciate by $5,000 in the first year, but the lessee might only pay a total of $3,600 in lease payments during that time. If the car is totaled at the end of the first year, the consumer will need to make up for the difference between what they paid and the value the car has lost. The gap amount would be $1,400, in this case.