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 buy 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 it off 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 take a hit in the actual value of the car 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 longer you own that new car, the more it will depreciate. The biggest decrease in value generally happens in the first year of using it. After that, it continues to gradually lose resale value. There comes a time when you look at that loan you took out 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 car, what you hope to get back is not just what the car’s resale value is worth, but enough to pay off the car loan. Otherwise, paying off the loan has you wondering if you got such a great deal when you first bought the car. Gap insurance to the rescue! That is 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 great thing about gap insurance is that it is cheap. The average added premium to your auto insurance will roughly be between $25 and $50 a year to start with. It is based on the amount of your comprehensive and collision auto insurance policies, and as we know, the longer you own your car, the power those costs will be over time. So the cost of your gap insurance policy will fall as well.
But the cost and value of gap insurance will actually be in your hands. Here’s why. First, the longer the term of the car loan, the more interest you will pay and the longer it will take for the resale value to drop below the amount on the loan. 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 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 particular policy, the higher the premiums will be for everyone. So not many claims are actually 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 their loan 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 ask if it is worth it. It is a subjective decision because there are so many x-factors involved. No one buys a new car planning to have it totaled in a year or two. But if it happens, then you will be stuck with paying off the loan 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 are worth the small amount you have to pay for protection, while others believe they are a waste of money. If you are in the latter group, your decision has already been made.
Finally, there is your financial position. If you think $50 or more a year can be a budget problem, then it really makes the decision difficult. Without an insurance gap policy, the unexpected accident can leave you in a very bad financial position. Add to that 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 subject of this article actually has a major impact in your car buying decision because if you want gap insurance, everything from the make and model of your car to the amount of the down payment will have to be carefully considered.
We didn’t mean to ruin your new car shopping experience, but we did think you should know.