Buying a new car can be an exciting experience. You do the research, take test drives, and handpick every option to make it truly YOUR car. You’ve even made it through the finance office. Now it’s time to drive it off the lot. It’s yours! You post pictures on Facebook, tweet pictures of your new ride and even offer to drive coworkers to lunch so they can smell the “new car” smell! You are loving it!
Fast forward 6 months or a year or two down the road. You hydroplane during a rain storm, hit a patch of ice, or someone hits you. The car is totaled. To make matters worse, there are still 2 or 3 years of payments left. The insurance company pays an amount that happens to be less than you owe. What do you do? What can you do?
This scenario plays out fairly frequently because cars depreciate faster than their loans are paid.
- A new car loses 11% of its value the minute you drive off the lot *
- During the first 5 years the car depreciates by 15% to 25% each year “
- After five years the car is worth 37% of what you paid for it at the dealership *
- As of January 2011, the average length of a car loan was 62.3 months ^
The bottom line is you are responsible to pay the balance remaining after the insurance company pays the totaled value of your car, UNLESS you have gap insurance.
Gap insurance is optional coverage that may be added to your car insurance policy when you buy a new car. It covers the “gap” between what your car is worth if totaled and what you owe on it.
- Most insurance carriers offer this, but always confirm before you purchase a new car
- Cost will vary greatly by carrier and type of car (I’ve seen ranges of $5 a month for a mid-level sedan to $50 a month on a luxury car)
- The finance manager will also offer this to you in a total dollar amount that will be financed over the life of the loan
Should you get gap coverage from your insurance carrier or from the dealer? This is a pure financial decision. For our clients,
- We quote the new car’s insurance first
- This helps our clients know what the new car’s impact will be on their insurance bill
- We also show the cost of gap coverage so they’ll be able to compare that cost to what the finance manager will offer them
I believe it’s important for our clients to be able to compare and make a decision that’s in their best interest. I also recommend lining up financing before walking on the lot as that empowers you to get the most competitive deal.
What have you experienced? Share your story or suggestions with us in the comments section below or on our Facebook page! We’ll all learn from each other.
Sources: * www.edmunds.com & ^ www.carloanpal.com
