Is Gap Insurance On New Cars Necessary?

Gap insurance was initially used for leased vehicles only, however, the popularity of long-term auto financing also makes it a very necessary investment for drivers who are or can become upside-down in their loan or car trade in value.

Here’s why: If the new car is totaled, stolen or damaged beyond repair, your auto insurance covers the vehicle’s current market value. Because new cars depreciate between 20% and 30% the minute you drive them off the lot, if you bought a car priced at $20,000, you’re insurance will give you around $14,000 for it. But the car finance loan still needs to be paid in full and where will the remaining $6,000 (plus interest) come from? Your pocket.

Now for the good news. Gap insurance on new cars kicks in precisely in this type of situations and covers the difference between what the insurance company pays you and what is owed to the financing entity. Depending on the policy you purchase, it can be used when the car is totaled, stolen or irreparably damaged because of natural disasters.

Think this can’t happen to you? Well, these situations may not be as “unlikely” as you think. Take a look at some numbers we found: – 3 models less than 2 years old figure in the top ten list of most frequently stolen passenger vehicles. According to the National Highway Traffic Safety Association, some brand new trucks, SUVs and minivans have up to 30% chances of rolling over, 15% for some new passenger cars. – More than 500,000 cars were flood damaged during hurricane Katrina.

Most leased vehicles either require or include gap insurance, and some automobile insurance companies include it their comprehensive policies, so be sure to check your contract before running off to buy gap insurance on new cars.

Keep in mind that there are limitations to how much money you can receive from the gap insurance company, some cover a maximum of 25% of the vehicle’s actual cash value, others will give you up to $50,000, so be sure to ask your insurance company.

The price of gap insurance varies depending on the company and car, although it’s usually not a huge expense. If you are or can become upside-down in your auto loan, it’s totally worth the money.

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