The adventure of buying a new car is one of the best experiences we can have. (Let’s assume, for this article, that you can buy the car instead of having to buy the car to increase your happiness quotient). As we all know, once you stop trying the different models and add all those new tech options, then there’s the financing. You get the keys to your new car and pull it out of the lot.
The value of your new car has just dropped significantly.
The common knowledge, that your loss is about 50% of what you paid for it, is generally accepted. But that’s wrong. You get a hit on the actual value of the car, which is technically called depreciation.
Now is the right time to introduce you to what is known in the insurance industry as gap insurance. The longer you own that new car, the more it will depreciate. The greatest decrease in value generally occurs during the first year of use. After that, it continues to gradually lose resale value. There comes a time when you look at the car loan you took out and realize you owe more on the car than the car is worth.
If you have an accident that is serious enough to total your car, what you hope to recover is not just the resale value of the car, but enough to pay off the car loan. Otherwise, paying off the loan leaves you wondering if you got such a great deal when you first bought the car. Gap insurance to the rescue! That’s exactly what gap insurance does: It pays the difference between what you get for the car’s resale value and the original car loan amount. Basically, you balance yourself.
It is cheap
The first big advantage of gap insurance is that it is cheap. The average additional premium to your auto insurance will be about $25 to $50 a year to start. It’s based on the amount of your comprehensive and collision auto insurance policies, and as we know, the longer you own your car, those costs will be over time. Therefore, the cost of your gap insurance policy will also be reduced.
But the cost and value of gap insurance will really be in your hands. This is why. First, the longer the term of the car loan, the more interest you’ll pay and the longer it will take for the resale value to fall below the loan amount. Why? Because longer loan periods will have lower monthly payments. Then there is the make and model of the car. Do your homework and learn which models depreciate the fastest. The faster a car depreciates, the higher the gap insurance value.
An important question is why insurance is so cheap. A general insurance rule is that the more people who file claims against a particular policy, the higher the premiums for everyone. Therefore, not many claims are filed against gap insurance policies. Most people want to buy a car that slowly depreciates, despite gap insurance. That means the number of people who actually get to the point where their loan amount exceeds the actual cash value of their car is very small.
Worth it?
We have reached the point where it is time to ask ourselves if it is worth it. It is a subjective decision because there are many x factors involved. Nobody buys a new car with the intention that it will total in a year or two. But if it happens, then you will be stuck with the loan payment and show nothing but a heartache.
The cost of insurance also plays a role because different people feel differently about insurance policies in general. Some think they are worth the small amount you have to pay for protection, while others think they are a waste of money. If you are in the last group, your decision is already made.
Finally, there is your financial position. If you think $50 or more a year may be a budget issue, then it really makes the decision difficult. Without a gap insurance policy, the unexpected accident can leave you in a very bad financial position. Add to that that most people rely on a car for just about everything, especially commuting to work.
These are things to think about and the decision is entirely yours. The subject of this article actually has a big impact on your car buying decision because if you want gap insurance, everything from the make and model of your car to the down payment amount will need to be carefully considered.
