Gap Amount

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Lease Balance

    The amount of money that a customer owes under the terms of a ...
  2. Lease Extension

    A legal agreement that extends the term of a rental agreement. ...
  3. Open-End Lease

    A rental agreement that obliges the lessee (the person making ...
  4. Leveraged Lease

    A lease agreement that is partially financed by the lessor through ...
  5. Lease

    A legal document outlining the terms under which one party agrees ...
  6. Closed-End Lease

    A rental agreement that puts no obligation on the lessee (the ...
RELATED FAQS
  1. How can I find net margin by looking a company's financial statements?

    In finance and accounting, financial statements represent the fundamental means of analyzing a company's financial position, ... Read Full Answer >>
  2. What can working capital turnover ratios tell a trader?

    A company's working capital turnover ratio is traditionally positively correlated with business performance. A high, or better ... Read Full Answer >>
  3. What is a negative write-off?

    A negative write-off is a write-off conducted by a company or accountant after deciding not to pay back an individual or ... Read Full Answer >>
  4. What metrics can be used when evaluating a telecommunications company to ensure its ...

    Cash flow analysis has been transformed since the widespread introduction of statements of cash flow, and investors have ... Read Full Answer >>
  5. How do you record adjustments for accrued revenue?

    An accountant records adjustments for accrued revenues through debit and credit journal entries in defined accounting periods ... Read Full Answer >>
  6. What do I do if I think an accountant is in violation of the Generally Accepted Accounting ...

    The Financial Accounting Standards Board (FASB) promulgates generally accepted accounting principles (GAAP) in the United ... Read Full Answer >>
Related Articles
  1. Budgeting

    12 Car Insurance Cost-Cutters

    If car costs are dragging you down, find out how to free yourself from some of the extra weight.
  2. Personal Finance

    Top 10 Ways To Get Top Dollar For Your Car

    Find out what steps you can take to reduce the depreciation of your vehicle.
  3. Home & Auto

    Wheels Of A Future Fortune

    Buy a quality car without driving your expenses through the roof.
  4. Home & Auto

    New Wheels: Lease Or Buy?

    These two major ways to obtain a car have very different advantages and drawbacks. Find out which is best for you.
  5. Options & Futures

    Beginner's Guide To Auto Insurance

    Find the perfect policy that suits both your coverage and budgetary needs.
  6. Options & Futures

    Top Tips For Cheaper, Better Car Insurance

    Accident, theft, vandalism - make sure your coverage will protect you when you need it most.
  7. Insurance

    The True Cost Of Owning A Car

    Driving is often the most convenient way to get around, but it'll cost you.
  8. Fundamental Analysis

    Explaining the Common Size Income Statement

    A common size income statement expresses each account as a percentage of net sales.
  9. Professionals

    What Does an Auditor Do?

    An auditor ensures that organizations maintain accurate and honest financial records.
  10. Fundamental Analysis

    Calculating the Net Debt to EBITDA Ratio

    Financial analysts typically use the net debt to EBITDA ratio to determine a company’s ability to pay its debt.

You May Also Like

Hot Definitions
  1. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  2. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
  3. Killer Bees

    An individual or firm that helps a company fend off a takeover attempt. A killer bee uses defensive strategies to keep an ...
  4. Sin Tax

    A state-sponsored tax that is added to products or services that are seen as vices, such as alcohol, tobacco and gambling. ...
  5. Grandfathered Activities

    Nonbank activities, some of which would normally not be permissible for bank holding companies and foreign banks in the United ...
  6. Touchline

    The highest price that a buyer of a particular security is willing to pay and the lowest price at which a seller is willing ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!