Everyone knows that a new car depreciates in value the minute you drive it off the lot, by up to 20 percent. But will that drop in value immediately put you “upside down” in the vehicle? If the unthinkable happens and you total your car, will you owe more than it is worth? If you think this could happen, you may want to consider gap insurance.
If your car is totaled or stolen, gap insurance will cover the “gap” between how much your car is worth and how much you still owe on it. Say you are driving around a vehicle with a market value of $20,000. Since you still owe $23,000 on it, that extra $3,000 (plus any applicable deductible) is coming out of your pocket. Now gap insurance won’t pay the deductible, but it will cover the $3k.
According to the Insurance Information Institute (www.iii.org), you should consider purchasing gap insurance if you: Made less than a 20 percent down payment; Financed for 60 months or longer; Purchased a vehicle that depreciates faster than the average; or Rolled over negative equity from an old car loan into the new loan.
For a leased vehicle, gap insurance may make the most sense. Since you are not paying the vehicle off, just paying to use it (in a sense), those payments will be smaller than those for a conventional car loan. Less vehicle equity will be paid and the gap between what the car was worth new, what it is worth now, and how much you have paid on it.
You call your insurance professional when you need an insurance binder for your new ride. Why not discuss gap insurance, too? Some dealerships may offer you a gap insurance policy, but just like you didn’t go to your agent or broker looking for a good deal on a car, why buy insurance from a car salesman?