Buying a new car is exciting. It’s easy to spend hours daydreaming about make, model, and accessories. And of course, there’s that new car smell. But there’s an important catch when you buy a new vehicle – the value depreciates the second you leave the dealer’s lot. It’s an unfortunate reality that all car owners have to face. But it’s a reality that can be managed with a type of car insurance called gap insurance.
Wondering what that is? Great – we’re going to explain what gap insurance is and whether or not you actually need it.
What is gap insurance?
Gap insurance, or guaranteed asset protection, is handy to have if you’re buying a new car or you’re getting a car that depreciates in value faster than normal.
Let’s take a look at why:
To buy your new set of wheels, you take out a loan. You now owe money to a lender. Yippee. You get car insurance for your new vehicle – hooray. But here’s the thing. Your loan is for the value of the brand-new car. But if your brand-new car is totaled or stolen, your insurance will only reimburse you for the value of the car at the time of the loss (if you have collision and comprehensive coverage.)
Right about now, is the time to say, “Wait a minute, I thought the value of my car depreciates over time…Uh oh.”
So, that’s the problem. When you buy a new car and the value depreciates, you may end up owing more on your loan (the balance) then your insurance company will reimburse you for. The value of the car could depreciate faster than you’re paying off your loan. And that’s where gap insurance comes in. It will cover the difference between the balance of the loan and the payout from the insurance company so you can give the lender all their money back.
Let’s illustrate with an example.
You have $25,000 left on your car loan. You’ve got your payments under control and everything, but let’s say the car’s value has depreciated to $21,000. You’re involved in a bad accident. Fortunately, everyone is okay and no one was seriously hurt, but, well, you can’t say the same for your car. It’s totaled.
The insurance company does its job and pays out the claim. But they only give you $21,000 because that’s what the car was worth. The $21,000 goes towards paying off the loan. But that still leaves $4,000.
And that’s where gap insurance comes in. It can reimburse you for the difference between your loan balance and the value of your vehicle.
Do I need gap insurance?
If you do not own your car outright, meaning you have a loan or a lease, you may want to put some thought towards gap insurance if any of the following apply to you:
- You’re leasing a vehicle
- Your loan is for three or more years
- You have not made a significant down payment
- You drive a lot (this can make the value of your car depreciate faster)
- You purchase a vehicle that’s known to depreciate faster than normal
You may have to do some number crunching to see how quickly your vehicle’s value will depreciate in relation to your loan payments. And you have to consider how much money you’re putting towards your down payment.
Why you need to re-evaluate your need for gap insurance every year.
As your loan balance goes down as you make payments, you might find that you no longer need gap insurance because your car is worth more than the balance of the loan. Be sure to do some number crunching every year before renewing your gap insurance.
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So, that’s what you need to know about gap insurance. You may want to consider it if you’re buying a new vehicle. Before you take off and start cruising around in your sweet new ride, be sure to consider your car insurance and the value of your loan. We don’t want to be harbingers of doom, but we do want you to be prepared for anything.
Do you want to save money on car insurance? We’d be happy to help with that. Our agents can help you shop for the best coverage at the best rate. We strive to make insurance easy, too. To get in touch, all you have to do is fill out our online quote form or give us a call today.