New cars are great. Everyone likes the feel, smell, and idea of a new car. If you like cars, you know that nothing feels better than taking the wheel of you brand new car for the very first time. The problem comes if you are unlucky enough to have an accident.
New cars lose a lot of value as soon as they are sold.
Once the car passes into your hands, it becomes a used car. This means that in nearly every case, it will lose 15% or more of its value. Of course, you may have a loan that is much closer to 100% of the cost of the new car. No one worries about this until an accident happens that totals the car.
Insurance companies base their collision coverage on the actual cash value of the car.
Actual cash value means the worth of the car at the time of the accident. The insurers do not care how much is owed on the vehicle. They are only going to pay what they believe it would cost to buy another used car of the same type and condition. The result is that you can take a financial hit for several thousand dollars just to retire the debt on the car without being able to replace it.
Gap insurance helps to fix this problem.
When you buy gap insurance, it is designed to fill in the “gaps” left by regular collision insurance. While it does not usually cover a deductible, it will make up the difference between the cash value of the vehicle and the loan amount. If you carry a low enough deductible, this can mean that your out of pocket to pay off your current car may only be a couple of hundred dollars. This is far better than several thousand.
The trick is to find gap insurance that is reasonable in price.
Because gap insurance only covers the gap, it generally does not break the bank to purchase it. The key is to monitor the amount of your loan relative to the value of your car. When these two numbers are getting within the amount of your deductible, it is time to ditch the gap policy. Some gap policies can be attached to your collision insurance so that this change happens automatically. Even if they are attached, you may have to advise your agent or broker when the time to drop the gap coverage has arrived.