Do You Really Need Gap Insurance?
If the following true story sounds familiar, then you really need gap insurance.
Last year, my lovely wife of 38 years bought a new $32,000 Toyota Solara. She put $4,000 down
and financed her purchase through the dealership for 6 years at 7.99%.
Fast forward a year and she notices that her Big Red Bank is offering car loans for 3.5% and
decides to apply for a new loan. Getting it was no problem, but she had to pay down her existing
loan balance by $3,000 in order to qualify.
In essence, the bank was telling her that despite making 13 payments on a meticulously
maintained car driven a scant 11,000 miles, it was still worth $3,000 less than the outstanding
loan balance. Or to put it another way, the loan was "upside down" in the amount of $3,000.
Now if the bank valued her car at $20,875, or $3,000 less than the loan balance, you can be sure
our insurance company would have pegged it's actual cash value somewhere close to the bank's
valuation.
So if the car had been totaled in an accident before it was refinanced, and we didn't have Gap
coverage, we would have been liable to the bank for an additional $3,000 over and above the
insurance settlement.
The main reasons why many new car owners like my wife face potential financial calamity from
accidental loss are the alarmingly fast rate at which new cars depreciate, low or no down
payment purchase requirements, and extended loan repayment schedules.
For instance, if you choose a zero down loan and spread the car payments out over 60 months it
takes roughly 4 years before the value of your vehicle equals the loan balance.
However, you can avoid financial disaster by either putting at least 20% down on your new car
and accepting a shorter repayment schedule, or purchasing auto gap insurance.
Last year, my lovely wife of 38 years bought a new $32,000 Toyota Solara. She put $4,000 down
and financed her purchase through the dealership for 6 years at 7.99%.
Fast forward a year and she notices that her Big Red Bank is offering car loans for 3.5% and
decides to apply for a new loan. Getting it was no problem, but she had to pay down her existing
loan balance by $3,000 in order to qualify.
In essence, the bank was telling her that despite making 13 payments on a meticulously
maintained car driven a scant 11,000 miles, it was still worth $3,000 less than the outstanding
loan balance. Or to put it another way, the loan was "upside down" in the amount of $3,000.
Now if the bank valued her car at $20,875, or $3,000 less than the loan balance, you can be sure
our insurance company would have pegged it's actual cash value somewhere close to the bank's
valuation.
So if the car had been totaled in an accident before it was refinanced, and we didn't have Gap
coverage, we would have been liable to the bank for an additional $3,000 over and above the
insurance settlement.
The main reasons why many new car owners like my wife face potential financial calamity from
accidental loss are the alarmingly fast rate at which new cars depreciate, low or no down
payment purchase requirements, and extended loan repayment schedules.
For instance, if you choose a zero down loan and spread the car payments out over 60 months it
takes roughly 4 years before the value of your vehicle equals the loan balance.
However, you can avoid financial disaster by either putting at least 20% down on your new car
and accepting a shorter repayment schedule, or purchasing auto gap insurance.
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