Buying a new car is exciting, but it’s important to remember that the moment you drive it off the lot, it starts to lose value. In fact, within the first year, most cars lose around 20% of their value. While standard auto insurance policies cover the depreciated value of your vehicle, they may not cover the full cost of a total loss or serious damage. That’s where gap insurance comes in.
When you finance the purchase of a new car, you may only put down a small deposit, and the amount you owe on the car may exceed its market value in the early years of ownership. In the event of an accident that results in a total loss or serious damage, your standard insurance policy will only cover the current market value of the vehicle, which may not be enough to pay off your outstanding loan or lease balance.
This is where gap insurance comes in. Gap insurance covers the “gap,” or difference, between what your standard insurance policy will pay out and the amount you still owe on your car loan or lease. This can be a lifesaver if you’re in a serious accident and don’t want to be stuck paying off a loan or lease on a car you can no longer drive.
For example, let’s say you finance a new car for $30,000 and only put down a $2,000 deposit. A year later, the car is worth $24,000. If you get into an accident and your car is totaled, your standard insurance policy will only pay out $24,000, leaving you with a $4,000 balance on your car loan. But if you have gap insurance, the policy will cover that $4,000 difference, so you won’t be stuck paying off a car you can no longer drive.
Gap insurance is particularly important if you’re leasing a car, as leases often require you to maintain full coverage insurance and can have high early termination fees. In the event of an accident, you could be on the hook for thousands of dollars in fees and penalties, which can be avoided with gap insurance.
In conclusion, if you’re buying or leasing a new car, it’s important to consider gap insurance. While your standard insurance policy will cover the current market value of your vehicle, it may not cover the full cost of a total loss or serious damage. With gap insurance, you can have peace of mind knowing that you won’t be stuck with a loan or lease balance on a car you can no longer drive.