Fill in the Gap with Gap Insurance Coverage

car1Let’s look at Gap insurance coverage by first relating it to something making national headlines right now.  Right now we have a housing crisis.  Here is the simple explanation.  Let’s say that you bought a house for $200,000 in early 2008.  Fast forward to now and because homes have gone down so much in value, your home is now worth $120,000.  The problem is that you still owe $185,000 on a home that is only worth $120,000.  You have an upside down mortgage.  How does this relate to your new car?

 

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Something similar can happen with your leased or financed car.  Let’s say that you took out a 4 year car loan on a brand new car.  That car set you back $32,000.  You drove it off the lot and all of a sudden it had depreciated and it’s now worth $25,000.  Even worse, on the way home you got in an accident and totaled your brand new car.  You owe $32,000 on your car loan but when the insurance company declared your car a total loss, they valued it as $25,000.  You have a “gap.”  In order to get out of this loan, you have to fork over $7,000 out of your pocket to pay it off.  That is where gap insurance coverage comes in.

 

All loans are upside down for quite a while.  (Remember that upside down means that you owe more to the lending company than the car is worth because you pay a larger percentage towards interest at the beginning of the loan or lease)  Because of this, you must have gap insurance coverage when financing a new car.

 

There is good news though.  A lot of insurance companies now include gap insurance coverage in their comprehensive coverage.  Make sure you ask your insurance company about this.  Don’t just assume.  If they don’t and you have to purchase gap insurance coverage, you probably won’t pay more than $50 for a year of coverage.  That’s a small price to pay to not pay that $7,000 above.

 

Can you purchase gap insurance coverage for older cars?  No you normally can’t.  The reason is that used cars don’t depreciate as quickly as new cars so the gap doesn’t open up as fast as with new cars.  Not so much to worry about in this case.

 

Don’t let this little known insurance pitfall hurt your wallet.  Often, it’s just a matter of making sure gap insurance coverage is in place for you.  Not knowing will still cost you money.

If you get in an car accident, you will need to know what to do. Click here to go to the elementary finance bookstore to order your copy. You can also take a look at the book in the box above.

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