Buying a new car is an exciting time for anyone and there are not many retail splurges which can rival the feeling of driving a shiny new car away which is just out of the factory. However, the sad fact is that once the wheels hit the road tarmac, its value has already fallen.
For most people purchasing a new auto, the drop in value is not an issue but for those buying it on finance with little or no deposit, the difference between what an insurer would pay and the remaining balance on the credit agreement needs to be taken into account.
Whilst no-one likes to consider the possibility of crashing their lovely new auto, if the worst were to happen and the vehicle is damaged beyond repair, there would be financial repercussions for those paying for the car on finance.
The way in which an insurer calculates the sum payable bears no relation to the price the auto would cost to purchase from a retailer. This means that for those who are paying for the vehicle primarily with a loan, an accident in the first couple of years particularly could be catastrophic financially. The difference between the amount received from an insurer and the finance balance could total several thousand dollars, meaning the motorist is left with monthly repayments for a car that no longer exists.
This is where gap insurance can be a lifesaver. This type of cover will pay out the difference between what the insurer is prepared to stump up and the balance left on the vehicle`s finance. This clears the total debt and leaves the motorist free to purchase another vehicle without still having to shell out each month for an auto they no longer possess.
Gap insurance is also crucial for those who lease a vehicle long term. Should an accident occur, the same principles apply with insurance and the majority of leasing contracts will stipulate that the full cost of the auto is payable. As the gap between an insurance payout and the cost of the car is the greatest in the early years, an unlucky driver without gap insurance could be faced with a substantial bill for a car they never owned.
Motorists who would particularly benefit from considering gap insurance are those who have heavily financed the purchase of their vehicle, especially those who have opted for a longer repayment term as this means the outstanding balance will reduce far more slowly, leaving a shortfall for longer. Certain cars also depreciate more quickly than others – as a general rule, Japanese and German cars tend to hold their values for longer. It is also possible to end up with a loan for more than the purchase price of the car if optional extras such as tax, warranties and insurance are added to the finance package. This immediately puts the driver into negative equity, creating a much larger gap which will last for longer.
Gap insurance is widely available and can be taken out at any time, not just when a vehicle is purchased or leased. However, in order to keep the cover valid it is important that all terms of the insurance are complied with which could mean regular services and a fully comprehensive policy. Gap insurance is usually available from dealers as well as insurance companies but are charged for in different ways. Purchasing the cover directly from the auto vendor means a one-off fee which is likely to be several hundred dollars, but could be added to a finance deal.
Arranging for gap insurance via a standard auto insurance provider usually means a small increase to the monthly premium as the insurance is charged on an ongoing basis. When deciding how to pay for gap insurance, it may be worth using a loans calculator to decide whether it is more affordable to add it to the monthly insurance premium or the finance deal..