Buying a new car or truck can be an expensive proposition with most price tags hovering in the neighborhood of $30,000 or more. Protecting your new ride requires that you have car insurance, including collision and comprehensive insurance coverage – as well as gap insurance, if you’re leasing, before the dealer will let you drive it off the lot.
Depreciation in value vs. what you owe
Another interesting thing happens the moment you drive the vehicle onto the street – it depreciates in value. Within the first year of ownership, most cars and trucks can lose up to 20 percent of their value, which is a hard pill to swallow after dropping 30K on a new set of wheels. Nevertheless, knowing if you need gap insurance is secondary to first knowing what it is, if you’re unfamiliar with the term.
Plainly put, gap insurance is additional insurance you’re expected to have or purchase to cover the “gap” that exists between what a vehicle is worth and what you owe on it. This generally applies if you’re leasing or financing the purchase and get into a serious wreck that totals the vehicle. Because the amount of the car loan may exceed the market value of the vehicle during the first few years, gap insurance would make up the difference.
You have to keep in mind that, although you’re making lease or loan payments, as the buyer, you’re financially responsible for a vehicle that is still technically owned by the manufacturer or the dealership.
In most cases, gap insurance is part of the leasing terms and is already built into the lease agreement you’ll be signing. Furthermore, the bulk of standard auto insurance policies include gap insurance, and you may not even be aware you already have it. Here’s where it pays to check your policy before you shop for a new car to see if you have the coverage or not.
According to the Insurance Information Institute, you may want to consider purchasing gap insurance to protect yourself and your new vehicle if:
- You made less than a 20 percent down payment.
- You financed the vehicle for 60 months or longer.
- You’re leasing the vehicle.
- You purchased a vehicle that depreciates faster than the average.
- You rolled over negative equity from an old car loan into the new loan.
Should you not have gap insurance because your old trade-in wasn’t worth having comprehensive and collision insurance, it’s a good bet the auto dealer will offer to sell you gap insurance on your new car or truck. But, you’ll probably pay a lot less if you go through an insurance company. You just need to ask the insurer to add it to your policy.
But, before you deny gap insurance from your dealer, be sure you don’t need it. After that, you can drive with the peace of mind knowing you won’t get stuck having to come up with the difference between what your vehicle is worth and what you still owe on it.