There are many reasons why you may want to buy a brand new car, but it’s generally not meant as an investment. That’s because once you drive off with your brand new car from the dealership, it immediately loses a large percentage of its value. Inside a year, a brand new car typically loses 30% of its value. During the second year, you lose another 20%. So in other words, if you try to sell your car after 2 years, you’re only getting half the price you paid for it.
The problem is that when you’re buying a new car, usually you get a car loan. So let’s say you have a 5-year car loan, and you cover 20% of the price of the car after the first year. So there’s a 10% GAP in the price right there.
Imagine that you bought a $36,000 car and you’re paying it in $500 monthly installments. But then 2 months later, you total your car in an accident. Your bad luck doesn’t end there. Since you’ve paid just a total of $1,000 for the car, you still owe the car loan company $35,000.
Meanwhile, as the car has been totaled your car insurance company is required to pay you the actual value of the car. But that’s $36,000 minus 30% of its original value. So now the car insurance provider will give you back $25,200. Thus, you’re going to have to pay an extra $9,800 for a car that no longer exists!
Why buy GAP Insurance?
So why buy GAP insurance? It’s simple. You pay a little money, and you don’t risk paying a lot of money for a totaled car.
You’re now aware that you stand to lose quite a bit of money, if you total your car too soon after you buy it brand-new. To insure yourself against such a loss, you can buy some GAP insurance to cover the risk. You only pay a small amount of money so that in the case you total your car too soon, you don’t suffer a more catastrophic financial loss. That’s what it means when you buy GAP insurance.
Basically, you can pay a few hundred dollars (or even less) for an entire year just so you’re covered during that time. The GAP insurance provides you with the extra money so you get the difference between what you owe the car loan company and the money you get from the car insurance company.
The details of the GAP insurance obviously will differ depending on which insurance provider you make a deal with.
Types of GAP Insurance
Several types of GAP insurance are generally available for you:
- Return to invoice cover. This is the type of cover that applies when you buy your car from a dealer. The GAP insurance provider usually has some mileage and age limitations, however. For example, it may only apply if the car has less than 70,000 recorded miles and it’s less than 6 years old.
This type of GAP insurance will pay for the monetary difference between the value of the car when you bought it, and the money you get from the insurance company. So if you bought it for $25,000 and your original insurance company pays out only $18,000 then the GAP insurance company pays the extra $7,000.
- Finance cover. This covers the gap between what your original car insurance company pays out and the amount of money you still owe with the car loan company. So like the earliest example we gave, if you still owe the car loan company $35,000 and the car insurance company pays you $25,200 for the totaled car, then the $9,800 difference is paid out by the gap insurance company.
- Return to value cover. What if you don’t buy your car from a dealer? This return to value cover can then be a viable option. It first estimates the value of your car before you buy the gap insurance. Then when the original car insurance pays you out for the totaled car, the gap insurance covers the difference from the value of the car.
This means that you want a GAP insurance company to make as high a valuation for your car as possible. If your original car insurance company pays you only $15,000 for your total car, then you may get $3,000 from your GAP insurance company of their valuation at the time you bought the car is $18,000. If their valuation of the car was only for $17,000 then you only get $2,000.
- Vehicle replacement cover. This time, the amount covered by the gap insurance is the difference between the car insurance payout for the totaled car and the cost of replacing the car. The car must be the same model and make with the same specs.
Basically, this is a straight-up replacement deal so you don’t lose money. You get the very same car right afterwards and then the gap insurance money makes up the missing amount when you replace your totaled car.
Should I Buy GAP Insurance?
So should you buy GAP insurance? That depends. If there’s a significant GAP between what you can expect from the car insurance and the value of the car, then it can be a very deal for you.
There are several instances that make it the right case when to buy GAP insurance. These are when the GAP can be quite large.
- You’re buying a brand new (or even just a slightly used) car.
- You only put down a small down payment for the car when you’re financing it, so you still owe a lot of money to the car loan company for the first 2 years or so.
- You’re buying a very expensive car. That means the 30% devaluation for the first year will really equate to a very large sum of money. Imagine if you’re buying a car for $100,000. In the first year, it’s only worth $70,000!
- Even if you’re buying an econo-car, the money from the gap insurance can be a lifesaver if you don’t have enough money in your savings account to cover the difference when you total your car and you don’t get enough from the original car insurance to buy the same car.
So is it worth buying GAP insurance? For these instances,GAP insurance makes a lot of sense. But once the GAP no longer exists and you get a payout from the car insurance that matches your needs, then you no longer need the extraGAP insurance.
How to Buy GAP Insurance
You can start your search by asking if your car insurance offers GAP insurance too. Other insurance companies may also let you buy GAP insurance only. You can also buy online.
You can discover where to buy GAP insurance online comparing the following factors:
- Does the GAP insurance policy cover your situation? The GAP insurance provider may not be suitable if they only offer GAP insurance if you bought the car from a dealership and you actually purchased it from a private owner. If the GAP insurance policy is about how much you owe the car loan company, then it won’t work in your case if you bought the car up front.
- How much money do you stand to get? This means you need a quote or a formula from the GAP insurance company so you have a firm idea of what they will pay out. How much do they think your car is worth after 6 months or a year? How much do they think your car is worth now? It’s best if you can get a return to invoice cover, since that means the car didn’t devalue at all.
- How much do you have to pay in premiums? Obviously, the lower the premium amount, the better it is for you. However, when you stand to get more money from the payout, you generally pay more for premiums.
If the GAP in your case is huge, then it’s really a good idea to buy GAP insurance. The idea with insurance in the first place is to protect yourself from a disastrous financial risk, and GAP insurance eliminates the risk when you pick the right provider. While car rental insurance may not make sense, GAP insurance can be worth your money.