TWELVE REASONS WHY YOU NEED GAP INSURANCE IN CASE OF A MARYLAND CAR ACCIDENT
When you purchase a vehicle from a car dealership, the sales pitch often includes gap insurance. The reason is that your car loses value the moment you drive it off the lot.
In fact, the minute you sign the paperwork, your vehicle goes from being a new car to being a used automobile, and its value immediately decreases. Industry statistics show that new vehicles lose about 30% of their value in the first year after purchase, and 20% the second year.
As a result, car owners can end up being upside down on their loan: The value of the automobile is less than the loan amount. This makes gap insurance a wise investment if your vehicle is damaged or stolen within that time frame.
If you were to have a wreck in that brand-new car, your insurance company probably wouldn’t cover the cost of what you owe on it. They would only cover the cost of replacing your vehicle with one of the same value. This is why you should consider buying gap insurance when you purchase a new car.
Gap insurance is only used in the event of a total loss from a covered accident or theft, or a comprehensive loss not for mechanical repairs.
Gap Insurance is an optional, add-on car insurance coverage that can help certain drivers cover the “gap” between the amount they owe on their car and the car’s actual cash value (ACV) in the event of an accident. A car’s actual cash value is the car’s monetary value at the time of the accident, not the car’s original price.
Gap insurance example
Let’s say you’re involved in a covered accident and are found not at fault. Your car is damaged beyond repair and needs to be replaced. You still owe $15,000 on your auto loan, but your car’s ACV is only $11,000. If you have gap insurance, it can help you cover the $4,000 gap between what you owe on your loan and what your car is worth, after your deductible.
GAP insurance is usually paid upfront and, for that reason, one is eligible for a refund if he/she sells or refinances their vehicle
Gap insurance does not cover deductible costs. In the event of an accident covered by your gap insurance policy, you would still have to pay your deductible. In other words, if the “gap” reimbursement amount is $4,000 and your deductible is $500, your total reimbursement amount would be $3,500.
When are you likely to need to purchase gap insurance?
- You financed a car and made little or no down payment, 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.
- You’ve traded in an upside-down car and added the amount you still owe to your new car loan; gap insurance can prove beneficial in the event of a total loss.
- Financed for 60 months or longer
- Leased the vehicle (carrying gap insurance is generally required for a lease)
- Purchased a vehicle that depreciates faster than the average
- if you’ve bundled the costs of tax and registration into your financing,
- You’ve bought a car that doesn’t have great resale value
- You plan to pile the miles on quickly. Very few things reduce a car’s value faster than lots of driving.
- high interest rate loans
- You do not have significant cash savings that would allow you to cover the difference between the amount you owe on your loan and the actual cash value if your car is stolen or totaled.
- You are buying a vehicle of significant value.
When can you cancel gap insurance?
Once you have gap insurance, monitor your car’s changes in value (depreciation tends to slow after the first few years of ownership) and your decreasing loan balance. As soon as you’re no longer “upside down” — i.e., you owe less than your car is worth — you can remove your gap or loan/lease coverage.
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