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When consumers buy or lease new cars or trucks, their vehicles start depreciating from the moment they drive off of the lot. Values drop drastically for most vehicles during the first couple of years and for several years after that until they are in the low thousands. Many vehicle loans are spaced out over the span of several years. With many people choosing a 72-month financing plan to enjoy lower monthly payments, the problematic result is a gap between the actual value of the vehicle and what the buyer owes the financing company. The gap is even bigger when people do not put down any money or put down very little money for a down payment.

Since most vehicles depreciate in value by about 20 percent during the first year alone, it is important to think about that gap between the value and what is owed on the vehicle. Although buyers are offered gap insurance by dealers, they often turn it down after automatically assuming that it is another needless expense. However, the importance of gap insurance cannot be understated today with cars costing more and values declining fast. Both purchase and lease customers need good gap insurance for their investments. It is absolutely essential for lease customers. Gap insurance covers the gap amount between what a vehicle is worth and what is owed on it.

It is important to have gap insurance if:

  • Less than 20 percent of the purchase price was applied as a down payment.
  • The vehicle was leased.
  • The vehicle was financed for more than 60 months.
  • There was any negative equity rolled over into the purchase from an old loan.
  • The vehicle depreciates faster than the average depreciation rate.

Although dealers offer gap insurance for new vehicles and leased cars, it is not always the best product. Many people who do purchase it at the point of sale find out that it has exclusions or a higher price tag than other options. In the same way that it is important to research types of vehicles before buying one, it is equally important to consider insurance before making a purchase. It is cheaper to obtain gap insurance from a current auto insurer, and the annual total for a policy from an auto insurer is usually in the ballpark of about $20. When it is time to buy a new car, notify an agent of the new purchase to get the policy going immediately.

Discuss any concerns or questions about gap insurance with an Insurance Loft agent.

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