If you are planning or considering the purchase of a new vehicle this holiday season, you will soon hear about gap insurance. When you buy a new or late-model used vehicle, gap insurance covers the “gap” between the wholesale book value of a car and the amount that you will owe on the loan (assuming you finance the vehicle). Most collision insurance policies cover the wholesale book value of a car, which is significantly less than the retail price.
For example, if you pay $12,000 for a vehicle, the book value may only be $10,000 (or less). That means that if you total your brand-new car, you will have to pay off the remaining $2,000. Sometimes, the gap can be larger. Gap insurance usually costs a few hundred dollars, and you can typically spread this cost out over the life of an auto loan. In the scenario outlined here, the gap insurance policy would cover the $2,000 difference in the event of a total loss.
Gap coverage only benefits vehicle owners for the first few years. Over time, the gap shrinks. After a point, depreciation levels off. There is no black-and-white answer to the question of whether gap insurance is worth the money, but there are a few factors that you can weigh when evaluating the benefits.
Length of loan
The longer the term of your loan, the longer you will continue to be at risk without gap insurance. This is because if you have a longer-term loan, the principal will take longer to pay down, but your vehicle will depreciate just as quickly.
Savings / available cash
If you have enough cash set aside to cover the cost of the gap out of pocket in the event of a total loss, you may choose to take your chances. If money is tight, you may benefit by limiting your financial risk.
Amount of driving
The more you drive your vehicle, the faster its value will drop. If you plan to put heavy mileage on your vehicle, it will take longer for your auto loan balance to dip below the value of the vehicle.
Down payment size
The smaller the down payment you make on the loan, the greater the gap.
Rate of depreciation
Some vehicles hold their value better than others, but cars and trucks tend to depreciate sharply. If you are purchasing a vehicle that is expected to depreciate more quickly, your gap will be larger.
Before purchasing gap insurance, you may find it helpful to talk to your insurance agent. You may be able to purchase a similar policy at a lower cost from your current insurer.
When you drive home a new vehicle, we hope you will rely on the professionals at Atlantic Tire & Service to keep it running in top shape with regular service! Call or visit any of our three convenient Triangle locations to make an appointment today.
