Financing a new car? Here’s why you need gap insurance

If you’re looking to take advantage of the year-end new car clearance sales or are simply thinking about purchasing a new set of wheels in the coming weeks or months, you’ll likely be offered numerous transaction surcharges before the deal closes. While experts advise buyers to opt out of most of these – like extended warranties, rust protection and fabric protection – there is at least one that should be seriously considered, and that would be so-called “gap insurance.”

With new car prices averaging around $10,000 higher than they were five years ago, and financing terms extending up to six or even seven years to cushion the financial blow, almost one in four vehicle owners are now “under-priced” on their car Water”. loans, according to Edmunds.com.

Also called “upside down,” this means you owe more money on a vehicle than it is worth for insurance purposes. If a financed vehicle is stolen or totaled, the insurance company will only reimburse the owner for the actual cash value and not the amount he or she paid for it. This means you will have to provide the lender with a significant amount of money, and the situation will only get worse if the car was purchased with a minimal down payment and/or has a faster-than-average depreciation rate.

According to Edmunds, the average amount owed on upside down loans has risen to an all-time high of $6,458.

This is where gap insurance comes into play. This type of policy covers the difference between a specific vehicle’s value and what the owner or lessee still owes on it if it is stolen or totaled in an accident. To clarify, “Gap” does not mean the inequality mentioned above, but rather “Guaranteed Automatic Protection”.

The purchase is a prerequisite for leasing contracts and is becoming increasingly important for the buyer of a vehicle, especially for more expensive models that are financed over a longer period of time. It also provides a buffer against the possibility that resale value will collapse later.

Experts suggest that drivers consider purchasing gap insurance if they have less than a 20 percent down payment, have a previous auto loan balance rolled over to a later purchase and/or have a car, truck or SUV for 60 months or longer finance. especially with today’s higher interest rates.

Imagine a model that cost $40,000 when new but still has an outstanding loan balance of $32,000. If the owner gets into an accident and the vehicle is deemed a total loss with an actual cash value of $26,000 and a deductible of $1,000, the insurance company would offer compensation of only $25,000. However, gap insurance would cover the outstanding $7,000 that would otherwise be owed to the financing company.

Gap insurance can be purchased from a new car dealer or added to an existing car insurance policy, although not all providers offer it in all states. Please note that costs and conditions may vary from company to company. Typically, it only costs a few extra dollars per month when added to an existing insurance policy, or between $400 and $700 when sold by a dealer.

Some policies also cover comprehensive and collision deductibles, while some insurers bundle gap insurance as part of their paid new car replacement insurance. When you lease a new vehicle, the cost is typically built into the contract by the leasing company or the automaker’s financing department.

Gap insurance is essential for lessees because a new car lease is almost unbreakable. Whether the car is totaled or the lessee can no longer afford it due to a job loss or divorce, he or she remains responsible for all scheduled payments. Again, the difference between what the lessee still owes under the contract and the actual cash value of the vehicle can be significant, especially if the automaker originally artificially inflated the end-lease value of the car or truck or gave a hefty cash discount to encourage sales .

And even if it doesn’t necessarily have to be mentioned: If you own a car or truck free and clear, you don’t need gap insurance. The same goes for a property that is financed but is worth more than what is owed, either because of a large down payment or because online valuation tools show a higher resale value than expected.