The adventure of buying a new car is one of the best experiences we can have. (Let's presume for the purposes of this article that you can purchase the car instead of having to buy the car to increase the happiness quotient.) As we all know, once you get past trying out the different models and adding all those new tech options, then there is the financing. You get the keys to your new car and drive them back the lot.
The value of your new car has just decreased significantly.
The common knowledge, that your loss is about 50% of what you paid for it, is generally accepted. But that is wrong. You are taking a hit in the actual value of the vehicle which technically is called depreciation.
Now is the right time to introduce you to what is known in the insurance industry as gap insurance. The more you own that new car, the more it will depreciate. The biggest reduction in value generally happens in the first year of using it. After that, it continues to gradually lose resale value. There comes a period when you look at that loan you got for the car and realize you owe more on the car than the car is worth.
If you get into an accident that is bad enough to total your vehicle, what you hope to get back is not just what the car's resale value may be worth, but enough to pay off the vehicle loan. Otherwise, paying off the borrowed funds has you wondering should you got such a great deal when you first bought the car. Gap insurance to the rescue! That's exactly what gap insurance does – pays the difference between what you get for the resale value of the car and the amount of the original car loan. Basically, you break even.
The first big plus with gap insurance is that it is cheap. The typical added premium to your car insurance will roughly be between $25 and $50 annually to start with. It is based on the amount of your comprehensive and collision auto insurance policies, so that as we know, the longer you own your vehicle, the power those costs is going to be over time. So the cost of your gap insurance plan will fall as well.
But the price and value of gap insurance will in fact be in your hands. Here's why. First, the more the term of the car loan, the more interest you will pay and the longer it will require for the resale value to decrease below the amount on the loan. Why? Because longer loan periods may have lower monthly payments. Then there is the brand name of the car. Do your homework and learn which models depreciate faster. The faster a car depreciates, the higher the value of gap insurance.
An important question is why is the insurance so cheap. A general rule of insurance is the more people who file claims against a specific policy, the higher the premiums will be for everyone. So not many claims are in fact filed against gap insurance policies. Most people want to buy a car that depreciates slowly, gap insurance notwithstanding. That means that the number of people who actually reach the point where the amount of your finance exceeds the actual cash value of their car is very small.
Is it Worth it?
We have reached the point where it is time to inquire if it is worth it. It is a subjective decision since there are so many x-factors involved. No one buys a brand new car planning to have it totaled in a year or two. But if it takes place, then you will be stuck with paying off the borrowed funds and show nothing for it but a heartache.
The cost of the insurance also plays a role because different people feel differently about insurance policies in general. Some think they're worth the small amount you have to pay for defense, while others believe they are a total waste of money. If you are in the latter group, your decision has already been made.
Finally, there is your budget. If you think $50 or more a year can be a budget problem, then it really helps make the decision difficult. Without an insurance gap policy, the unexpected accident can make you in a very bad financial position. Additionally most people depend on a car for virtually everything, especially their commute to work.
These are things to think about, and the decision is entirely yours. The topic of this article actually has a major impact inside your car buying decision because if you want gap insurance, everything from the brand name of your car to the quantity of the down payment will have to be taken into consideration.
We didn't mean to ruin your new car shopping experience, but we did think you should know.