You just totaled your six-month-old car in an accident.
But you have full collision and comprehensive insurance coverage,
so you're fully protected and your insurance will replace your vehicle
at no cost to you. Right?
All the great financing deals being offered these
days -- such as no money down and no payments for months -- could
make you even more vulnerable.
What's more, the gap amount can be considerable.
Although most finance companies require car owners
to have full coverage on a vehicle, gap insurance isn't usually
included. If your car is totaled, -- or sometimes if it's stolen
-- especially within the first two years, you could be in for a
nasty surprise, due to the rapid depreciation of new cars.
The minute you drive a new car off the lot, its value
takes a nosedive. Essentially, it's not a new car anymore. But you
still owe the full value of your loan. The term for the situation
is called being "upside-down."
Car owners often assume that if their car is totaled,
it will be replaced at the amount they paid, or at least the amount
they owe. Not so.
"A new car is worth approximately 30 percent
less in three months than the day it was purchased, says Jessica
Luck, of Nowogroski Rupp Insurance Group in Seattle, Wash. "You
could own a car for three days and have what you consider to be
full coverage, but if the car is totaled, you could owe 20 to
30 percent of the amount financed."
Say you bought a car for $30,000 and financed the
total amount. In a few months that car might have an actual cash
value of only $24,000. Meanwhile, your monthly payments haven't
even made a dent in the loan. If the car was a total loss, your
insurance company would only pay you $24,000 and you would still
owe the lender the $30,000 you financed -- even more if you built
tax and license fees into the amount financed.
"Even though gap insurance is important for
people who buy cars, it is essential for those who lease,"
says Mary S. Butler, senior editor of cars.com.
"Gap insurance basically originated with leasing." The
upside-down nature of a typical lease is even more common than
a purchase situation because the lessee usually has no trade-in
and usually puts little or nothing down. Similar to a purchase,
if the car is a total loss, you owe the difference between what
you have paid and what you owe on the balance of the lease.
Often gap insurance is included in the cost of a
lease and you don't have a choice of providers. If not, or if
you're buying, your car dealer will probably be anxious to sell
it to you. But shop around -- your best price will probably come
from your existing auto insurer, if they sell it. Many do not.
Gap insurance is only available for new cars that
are being financed and may not cover cars that are deemed total
losses from other causes, such as theft and natural disasters.
"Read your lease or your gap insurance policy to find out
whether you are covered for all types of total losses or only
in case of an accident," says Robert Ellis, a spokesman for CarBargains.com,
a nonprofit consumer research group.
Some insurers include the benefits of gap insurance
in their regular comprehensive automobile coverage. Others, such
as MetLife Auto & Home insurance company doesn't offer a separate
gap insurance policy, but will actually replace your car for one
year or the first 15,000 miles, without depreciation even if you
didn't finance it, says Michelle Rupp, of the Nowogroski Rupp
Insurance Group.
But there is some good news regarding gap insurance
-- it's cheap. According to Rupp, "The policies we write
have never cost more than $14 for six months. It's a great value
for everyone who finances a car."
-- Posted: Feb. 15, 2005
