Have you bought a new car recently? Do you know someone who has? If so, were you offered gap insurance?
Most people haven’t even heard of this type of insurance, but it can be particularly valuable. Ever heard the joke about how you can hear the price of your new car drop as you leave the dealership’s forecourt? Well, it’s sad but true. When you buy a new car, the car loan is based on the dealership price, while the insurance is based on the value of the car’s actual worth.
So what does this mean in practical terms? Why is gap insurance so important? Here’s an example: say Janet purchases a car from the dealership for $30,000, and she borrows this amount from the bank. The following month, Janet gets in an accident, and the car is reduced to scrap metal—no point in fixing it. The insurance appraisal values the car at $27,000, and although the car was totaled, Janet still owes the bank $30,000, whether she can use the car or not. What happens to the $3,000 difference between the bank loan cost and the appraisal value? Since Janet purchase gap insurance, the remaining $3,000 is paid for by that policy. Continue Reading →