Is it worth it to get gap insurance on a new car?

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Here's what you need to know...
  • When you buy a new car that’s for sale at a dealership, the vehicle will depreciate by approximately 10 percent of its original value jut one minute after you drive off the lot
  • When you file a first-party or third-party claim for damage to your vehicle, each insurer is only required to pay up to the car’s Actual Cash Value when settling the damage claim
  • Actual Cash Value (ACV) is defined as the vehicle’s replacement cost minus a depreciation charge. The depreciation charge is changes based on the vehicle’s make, model, mileage, condition, and location
  • Since insurance will only pay for the car’s ACV, having a total loss on a vehicle can be financially devastating. You’re still obligated to pay off your loan even if there’s a balance after the insurance company issues the check
  • One way to cover the gap that’s present for cars with high loan-to-value ratios is to buy GAP insurance. GAP will pay off the remainder of the loan if there’s a balance due

New cars depreciate at an alarmingly fast rate. As soon as you drive off of the lot, the car’s value drops by nearly 10 percent of what it was worth just minutes before.

If you’re still interested in buying a car that has that new car smell, it’s important to build an insurance portfolio that keeps depreciation in mind.

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One way to go about protecting yourself from being obligated to pay for depreciation is to buy GAP insurance. GAP insurance is an optional coverage option that’s available to people who finance or lease vehicles.

The purpose of the coverage is to cover depreciation so that you don’t have to pay for it out-of-pocket. While GAP provides a great barrier of protection, it’s not always worth it. Here’s what you should know:

How much does a new car really depreciate?

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One of the main reasons why car buyers stay away from buying new cars is because of how quickly they lose their value.

You might think that it’s an exaggeration, but it’s the way that car values work. Cars are depreciating in value on a daily basis, but it’s when the car is driven off of the lot by its first owner that the car depreciates the most.

If you want to see just how much you can expect the value to drop by, it’s helpful to look at averages.

While some rare vehicle and other models that retain value longer than the average vehicle won’t fit into the law of averages, here’s a breakdown of how much cars depreciate after each year of ownership:

  • After one minute, a new car with just one mile will depreciate by 9 percent of its original value
  • After one year, a car with 15,000 miles will depreciate by 19 percent of its original value
  • After two years, a car with 30,000 miles will depreciate by 31 percent of its original value
  • After three years, a car with 45,000 miles will depreciate by 42 percent of its original value
  • After four years, a car with 60,000 miles will depreciate by 51 percent of it original value
  • After five years, a car with 75,000 miles will depreciate by 60 percent of its original value

Why is depreciation so important when you have an insurance claim?

If you took out a loan on your car, you know just how much you’re expected to pay each month until your car is paid off. You’ve agreed to make these payments and, as long as they’re made on-time, you know just when your car will be paid off.

Depreciate affects you the most when you plan to sell your car before it’s paid off.

It also affects you if you have a serious accident or loss while the car is still financed. Since insurance companies aren’t required to pay off your loan, you could be stuck paying for a car that you can’t drive well after it’s totaled.

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How much does an auto insurance company pay when your car is totaled?

Under your auto insurance contract, it says that the insurer is only required to pay up to your vehicle’s Actual Cash Value to repair or replace the vehicle after a covered loss.

Actual Cash Value is defined as the cost to replace the car minus the car’s custom depreciation charge. Since new cars depreciate quickly, there’s a good chance that having claim could cost you more than a deductible.

What is GAP insurance and how does it protect you?

GAP insurance stands for Guaranteed Auto Protection. It’s an optional form of coverage that consumers who are leasing or financing their vehicles can buy.

If you’re leasing your car, chances are your GAP coverage is written into your loan. If you’re financing, you can decide to buy coverage through the dealer or through your insurer.

GAP, like the name infers, is designed to pay for the gap between what you owe on your car and what your insurer will pay for the car when it’s declared a total loss.

When you file a total loss claim and there’s still a balance due on your loan, the GAP coverage will kick in pay the finance company.

Sometimes the coverage also provides you with a down payment for a new car.

How much does GAP insurance cost?

How much GAP costs will depend on where you buy it. If you buy it through the finance agent at the dealership, the dealer will roll the full cost for GAP into your loan.

The average cost is around $600 for the entire term of the loan. If you buy coverage through your insurer, you can expect to pay around five to six percent of your comprehensive and collision premiums each term.

When is it worth it to buy GAP coverage on a new car?

If you put only a small amount down or you buy a car that depreciates quickly, you should have GAP coverage. It’s especially worth it to buy GAP on a new car that is going to instantly drop in value in minutes.

If you want to find out how much it cost to add GAP to your insurance, contact your insurer. Make sure that your new car qualifies for GAP first.

After doing this, you should price the cost of coverage through an online comparison tool so that you can get the best deal.

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