Purchasing Gap Insurance is a wise idea - just not from the dealer.
Fall is a great time of year to purchase or lease a new or used vehicle. But hopefully, you know that the moment you drive your new vehicle off the lot, it loses 15% to 20% of its value. Dealers know that as well - which is why most try to convince you to purchase Gap Insurance as part of your overall financing plan.
Gap insurance covers the “gap” between what an insurance policy will pay out and the amount of money you owe on your car loan in the event of a total loss. When you buy a car, the retail price that you pay is greater than the vehicle’s resale value.
For example, let's say you buy a vehicle for $27,000 with $2,000 down. Shortly after purchase, it might only be worth $18,000 to $19,000 by insurance company calculations, based on factors including the car’s condition, price surveys, and industry guides such as Kelley Blue Book. On top of that, if you financed your car, you likely bundled additional costs into your loan that you cannot recoup, including sales taxes, title fees, emission fees, and registration.
If the worst case scenario arrives and your car gets totaled in an accident, the maximum insurance payout from your collision coverage without a gap insurance policy might leave you with a $7,000 loan balance and no car!
So dealers will likely tell you that for just a few extra dollars a month, you can protect yourself in the event that your vehicle is totaled. But what they don't tell you is that the gap insurance rates they're quoting can be up to 4 times the amount of the typical rate you'd pay if you purchased it through your insurance agent.
Bottom line - Gap Insurance can be a very wise purchase - provided you get it from your insurance agent instead of the dealer.
So if you're thinking about buying a new or used car, here are key instances when getting Gap Insurance from the Charles Meyer Insurance Agency probably makes sense for you:
If you finance a car with a high rate of depreciation, you can benefit from purchasing gap insurance. Most vehicles swiftly depreciate, but some cars depreciate very rapidly.
If you have financed your vehicle for more than 4 years, gap insurance may offer you some additional protection in the event of a total loss. A shorter financing period improves your loan-to-value ratio. In other words, the “gap” between what you owe on your car and what it’s worth will narrow and disappear much sooner with a short-term loan than it would with a longer term loan.
If your down payment was less than 20%, you may owe more than your car is worth. If your car is totaled or stolen, gap insurance can help you pay off the balance of the loan.
If you rolled a loan balance from another car into the loan, gap insurance can prove beneficial in the event of a total loss.
You may be required to purchase gap insurance if you are leasing a vehicle.
If you drive more than 15,000 miles annually, you can benefit from purchasing gap insurance. Cars with high mileage depreciate more quickly than other cars.
If you are a single car family, you probably cannot afford to be without a car for any period of time. Gap insurance coverage helps indemnify your family in case of a total loss.
How much should Gap Insurance cost?
The typical gap insurance rate is roughly 5% of the portion of your annual insurance premium related to comprehensive and collision coverage. These rates can vary a great deal based on car value, location, and driver history. For example, if you pay a $600 annual premium toward comprehensive and collision insurance, your gap insurance will likely be around $30 a year. Compare that to what you might be paying a dealer and there could be a difference of hundreds of dollars a year over the life of your loan.
So good luck car shopping this fall. And remember to call us at 314-894-1313 before you purchase to find out if Gap Insurance makes sense for you!