There’s no feeling quite like buying a new car. It’s tons of fun to drive your new set of wheels around and show it off to friends. But if an accident occurs before you finish paying off your loan, you could find yourself stuck between a rock and hard place.
No one wants to think about their new car being totaled, but it’s a reality we must all face every time we get behind the wheel. Even the most cautious drivers can still be hit by another less cautious driver. You’re probably thinking that your insurance will cover the costs if you get into a wreck, which is true in many cases—but it’s also limited.
If an accident, in which your car is totaled, is covered by your insurance, you will be compensated for the actual cash value of your car; that means the original sticker price minus depreciation. And you may be surprised to learn how quickly cars can depreciate in value. After just one year, a new car can lose up to 30 percent of its value, while after three years, a car can lose up to 50 percent of its value. This means that, depending on how old your car is when it’s totaled, you may owe thousands more on your loan that what your car is currently worth, which is referred to as being “upside down” on your loan.
How is that so?
Picture this. You buy a new car for $35,000 and a year later your car is totaled or stolen. You still owe $30,000 on your loan, but the actual cash value of your car is only $25,000. Your insurer pays you for that value, minus your $500 deductible, which leaves you with $24,500. However, once you put that amount toward your loan, you’ll still owe $5,500 to the lender. That means that you’ll have no car and a big bill that you’re responsible for paying off.
How can you prevent a similar situation?
Gap insurance is designed to keep you from going upside down on your loan. Simply add gap coverage to your auto policy and your insurer can pay the difference, instead of you. Car dealerships may try to sell this coverage to you when you buy your new car, but it often comes with a larger price tag. Check with your agent to see if you can buy it for less with your current insurer. Gap insurance can be added to your auto policy at any time and usually costs less than $30 per year, which decreases as your car ages.
Is gap coverage right for you?
This coverage has a very specific purpose and isn’t necessary for every driver. For instance, drivers who own their cars outright do not need this type of coverage. However, you may want to consult your agent about gap insurance if you’re currently financing your vehicle, if you put under 20 percent down on a new vehicle, if you’re leasing a vehicle or if you purchased a vehicle make/model with a history of high depreciation rates.
Call your agent today at 740-998-5544 or 937-981-2272 or email to learn if gap insurance is a smart investment for you.