Finally, the much-awaited day arrives! You walk into the car dealership to purchase that shiny, new car you’ve always dreamt of owning. A few minutes later, you zoom out pumped to hit the tarmac. After all, isn’t owning a car a huge asset? Well, you may be miles off from the truth than you think!
A new car loses 15 to 20 percent of its value the minute you drive off with it. In the next three years, it may depreciate to almost half of the price you paid at the time of purchase. And, God forbid, should you have an accident the depreciation on your car just keeps adding up.
Filling in the Gap
Auto insurance covers the costs that your car holds currently. So, if your car costs $20,000 and you take a loan of the same amount, the value of the car will depreciate by around $4000 almost immediately. In case there is a collision and the car is totally damaged within a few months of purchase, the insurance company will pay $16,000 leaving you to cover the rest of the amount.
Gap insurance fills the gap between the actual current cost of the car and the loan amount you have taken for the car, in case there is a total loss. Therefore, the $4000 in the above illustration is covered by gap insurance.
Is it worth it?
In case, you have put down the whole amount for the new car by yourself, auto insurance alone should suffice. However, if you have taken a loan to buy the car, gap insurance comes in handy in situations where your car is totaled.
Gap insurance is useful when leasing a car, when the down payment for the car is less than 20 percent of the total cost, if you clock more than 15,000 miles per year, when the loan amount from a previous car is carried over to the new amount or when the vehicle you purchase has a history of rapid devaluation.
Insurance with you in the long run
Gap insurance may seem like an additional cost considering the expenses that go into the purchase of a brand new car. However, in the long run it can prove to be beneficial to keep you safe from not having a car at all!
A caveat! Buying gap insurance from your car dealer may burn a big hole in your pocket. Compare quotes, terms and conditions from as many auto insurance carriers as you can to determine the best one that fits your needs.
As you keep track of your loan payments and the depreciation of your car, the amount you owe for the car lessens and you may not require gap insurance after a while. Until then, gap insurance will give you the peace of mind to enjoy those long drives in your new car.
Author Bio: Elvis Donnelly is a father of two who works from home and lives with his wife. He is voracious reader and always looks out for happening topics related to personal finance. He specializes on subjects related to insurance and uses his spare time to write on topics related to auto insurance, car insurance quotes etc.