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What If… I Just Bought Myself A New Car?
Well, first of all – Congratulations!
We regularly receive calls from clients who’ve just purchased a new car and needed to update their insurance. What many of them didn’t know about is an optional coverage that can be crucial when you buy a new car and finance it with a car loan or lease.
We are talking about Gap Coverage. Gap coverage is needed when you are “upside down” on your car loan. This can happen if you take on a loan with a low or zero down payment, financing most of the car’s cost; or if you chose a longer (60 or 72 month) loan term.
The problem is that cars depreciate incredibly fast! In fact, the moment you drive your new car off the lot, it has lost some of its value. In some cases, this instant depreciation can be as much as 20%
So, if your car is totaled soon after purchase, it might only be worth only 80% of what you paid for it. That means, even if you paid $25,000 for the car brand new, the market value for your now used car could be as low as $20,000.
Meanwhile, you still owe the full amount of your loan (and taxes, if you decided to roll these into your loan as well.)
Your auto insurance company is only required to pay the “actual cash value” or current market value of your used car. In our example, that’s $20,000. Who’s paying the remaining $5,000? YOU! (If you don’t have Gap Insurance.)
This is where Gap Insurance comes in. It pays for the difference between your car’s value and your loan amount. We strongly recommend that you purchase “gap” coverage through your insurance company (if available) for about $25-$50 per year.
If you add it through your car dealer, you will usually be charged a lump sum of $500-$800. Often, this amount is then rolled into your financing and you will be charged interest on it… for the life of your loan! The advantage of buying gap coverage through your insurance is that you can delete it from your policy once your loan balance is paid down enough that the car is worth more than what you owe.
Questions?
Call us at 425.379.9200.