When you buy or lease a new car, it’s important to understand that the vehicle will start to lose value the moment you drive it off the lot. In fact, according to industry experts, most cars lose 20 percent of their value within the first year alone. This depreciation can be a problem if you’re involved in an accident that results in the total loss of your car.
Standard auto insurance policies typically cover the depreciated value of a car, which means they’ll pay the current market value of the vehicle at the time of the claim. However, if you financed the purchase of a new car and put down only a small deposit, the amount of the loan may exceed the market value of the vehicle in the early years of ownership.
This is where gap insurance comes in. Gap insurance is designed to cover the difference between what your standard insurance policy will pay (the current market value of the car) and the amount you actually owe on the vehicle. Without gap insurance, you could be left with a significant financial burden if your car is totaled or stolen and your standard insurance policy doesn’t cover the full amount you owe on loan.
For example, let’s say you bought a new car for $25,000 and financed the purchase with a five-year loan. After two years of making payments, you still owe $18,000 on loan. However, the current market value of the car has dropped to $15,000 due to depreciation. If your car is totaled in an accident, your standard insurance policy will only pay the current market value of the vehicle, which is $15,000. This means you’ll still owe $3,000 on loan, which you’ll need to pay out of pocket unless you have gap insurance.
While gap insurance is typically sold by car dealerships and added to the cost of a new car purchase or lease, it’s also possible to purchase gap insurance separately from a car insurance company. Many car insurance companies offer gap insurance as an optional add-on to their standard policies, which can be a cost-effective way to ensure you’re fully protected in the event of an accident or theft.
In conclusion, if you’re buying or leasing a new car, it’s important to consider gap insurance as a way to protect yourself from financial loss in the event of an accident or theft. Without gap insurance, you could be left with a significant amount of debt if your standard insurance policy doesn’t cover the full amount you owe on loan. By purchasing gap insurance, you can rest assured that you’re fully protected and won’t face any unexpected financial burdens in the event of a total loss.
