Why You Need Gap Auto Insurance - Get Out of the "Danger Zone"
What Causes The "GAP" In Auto Insurance Coverage?
Unless you pay cash for your new car, or make a substantial down payment, odds are your new car
loan is "upside down" the minute you drive off the dealer's lot.
An "upside down" loan simply means the amount borrowed to purchase an asset like an
automobile exceeds the value of the asset itself.
Most recently, you've probably heard the term used to describe the hundreds of thousands of
mortgages now in default.
Unlike a home, the value of an automobile at any point in its life is predetermined by a
depreciation schedule that takes into account make, model, year, equipment, and mileage.
Negative Equity
When your car is worth less than what you owe, it puts car buyers and lessees at risk because an
auto insurance policy won't pay out more for repairs or replacement than the auto is worth.
Here's an example of how negative equity happens:
Often, borrowers find themselves "upside down" (owing more than the auto is worth) through a
combination of factors, including:
Moving out of the danger zone of upside down debt is not an expensive proposition. Most gap
insurance riders from major insurance providers cost only an additional $20 - $30 per year.
Unless you pay cash for your new car, or make a substantial down payment, odds are your new car
loan is "upside down" the minute you drive off the dealer's lot.
An "upside down" loan simply means the amount borrowed to purchase an asset like an
automobile exceeds the value of the asset itself.
Most recently, you've probably heard the term used to describe the hundreds of thousands of
mortgages now in default.
Unlike a home, the value of an automobile at any point in its life is predetermined by a
depreciation schedule that takes into account make, model, year, equipment, and mileage.
Negative Equity
When your car is worth less than what you owe, it puts car buyers and lessees at risk because an
auto insurance policy won't pay out more for repairs or replacement than the auto is worth.
Here's an example of how negative equity happens:
- Your loan payoff $30,000
Your vehicle's actual cash value $26,000
The First GAP $4,000
Your deductible $500
The Second GAP $500
Your insurance settlement $25,500
The Total GAP $4,500
Often, borrowers find themselves "upside down" (owing more than the auto is worth) through a
combination of factors, including:
- Taking out a loan with an extended term A longer loan term not only means lower
payments, it means you build equity in the vehicle much more slowly.
- Depreciation All cars depreciate, but some lose value much more quickly than others.
According to some estimates, certain cars lose as much as 30% of their value within the
first three months.
- Putting little or no money down If you finance all or nearly all the price of the car, you
could be upside down as soon as you drive home, because a new car depreciates most at
the moment it becomes "used."
- Borrowing more than the purchase price Borrowers who finance the tax, license, and
registration, or extras such as service plans and extended warranties, will find themselves
upside down before leaving the lot.
Moving out of the danger zone of upside down debt is not an expensive proposition. Most gap
insurance riders from major insurance providers cost only an additional $20 - $30 per year.
| GAP Auto Insurance Coverage |
