While our main goal at CarInsurance.org is getting you the best policy for your hard earned dollars, we also love to answer the questions you ask about car insurance. One topic that seems to come up over and over in questions is gap insurance, so we decided a guide on gap insurance was a needed feature.
Anytime you purchase a new car, as soon as you finish the paperwork and drive off the lot in your new ride, it instantly depreciates. The value lost depends on the make and model, but most cars immediately lose 15-25% – or more – of their retail price value as soon as they become a used car, which occurs when they’re titled and driven.
It may sound confusing, but here’s how the process normally works: after research and test drives, you purchase a new car, either outright or via financing. You’re carrying insurance on the car, and it includes a deductible. The car loses a substantial portion of its value immediately, regardless of the amount you’ve financed.
Most car insurance policies only cover the actual cash value of the car they cover. So if you wreck that new car, you’re likely on the hook for an amount above and beyond the actual cash value – the actual amount you owe to your financing company might be higher – and combined with your deductible, you new car might just be a financial time bomb, waiting to explode.
There are a couple of ways to guard and protect yourself from this loss of value. First, negotiate the best possible deal you can on your new car. Not only in price, but in financing. Secondly, consider making a down payment that is equal to or more than the expected loss of value on the car when you drive it off the lot – this way, it’s a sunk cost you’ve already paid for. You’ve still “lost” the money, but there won’t be surprises down the road, like owing $5,000 more on a car after your insurance company totals it out.
This is what gap insurance is specifically designed to protect you from – owing a bank or financing company money on a car that has been declared a total loss by your insurance company.
We highly recommend that anytime you purchase a new car through financing that you also inquire with your insurer about gap coverage. We’d rank it the second most important item to discuss and obtain in many cases, right behind having comprehensive coverage to protect your investment and individual finances.
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