DEFINITION of Gap Amount
Gap amount is the portion of a leased or purchased 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 or financing agreement. To protect against losing money because of the gap amount, consumers can purchase gap insurance.
BREAKING DOWN Gap Amount
Gap amount refers to the difference between the amount paid by an insurance company and the amount still owed on a lease or payment plan if property is totally damaged or stolen. Insurance will only cover a certain amount of coverage if 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 or financing agreement, because of the way such agreements are structured. The payments at the beginning of the lease or financing 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 payments are flat amounts paid monthly over a period of several years.
Example of Gap Amount
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 in this case would be $1,400.