It can be exciting buying a new car. However, as soon as you drive your vehicle off the lot, you’re going to need to face the risks of the road.
When your car is newer, you’re likely going to face higher risks of financial hardship should an accident happen. This might include an obligation to continue paying off your car’s loan, even if you total the car.
If you find yourself in this situation, you might find that your insurer will not provide the adequate coverage to settle the loan. Fortunately, an extra form of protection - called gap coverage - might come in handy.
How Does a Car’s Value Change?
As soon as you drive your car home for the first time, its value will depreciate. Your new vehicle will become a used car, even if it is new to you. Usually, vehicles depreciate quite quickly. A new car might lose up to 20 percent of its value in the first year of ownership. Nevertheless, the actual cash value of the vehicle might not reflect its value to you.
When you bought your car, you might have financed it. This means you took out a loan to pay for the car, and then will repay the lender over time. The dealer receives the financing for the car, but you still must compensate the lender for the loan. Even as your car’s value depreciates, the loan’s value stays the same as you work to pay it off. The loan still reflects a cost burden to the owner.
Gap Insurance for Newer Cars
Many car insurance policies do not consider the value of a loan when issuing a payout following a car accident. Insurers frequently look at depreciated value of the vehicle when determining how much of a payout an owner is entitled to. They might pay you only for the car’s actual cash value, or the value of the car at the time of the accident.
Let’s say you total your car. You cannot drive it, and it is a complete loss. Nevertheless, your vehicle loan still exists. You’ll want to pay off this loan because it now means nothing to you. However, if your insurer only provides actual cash value coverage, that still may leave loan value behind that you still must cover.
This is where gap insurance can come in handy. Gap insurance can attach to your collision coverage in the event your vehicle is totaled. It can help loan holders repay some of the leftover value of a loan should a newer car be totaled.
Gap insurance is a valuable form of protection for loan holders. If you have a loan, talk to an Unity Stone Insurance Services agent about protecting it with gap coverage.