Unless you pay cash for your new car or you have put a significant down payment of 50 percent or better, you are going to be upside down at some point or another. The term upside down has been associated with auto loans for a very long time and it simply means that you owe more than the car is worth at any given point in the term of your loan.
Recently the term has been associated with home loans as well. Homes and real estate were never considered depreciable items, but cars always have been considered a depreciating item and not an investment.
When you covered your vehicle with car insurance, your insurance policy was probably written to cover the market value of that vehicle. This means that in the event of an accident where the vehicle has been destroyed, the insurance company will pay you the market value of your vehicle at the time of the crash. That value takes into consideration the mileage, the age and the general overall condition of the vehicle at the time of the wreck. This value is included in your insurance rates and is what your cheap car insurance premium is based upon.
In the case of a new car, that market value begins plunging the minute you turn the key on and drive off the dealer’s lot. Depending on what make and model of new car you purchased, the depreciation can be significant. According to Edmunds.com, a service for car enthusiasts, a new car will depreciate 11 percent upon leaving the lot. By the time year five rolls around, you will have lost over 35 percent of your original price.
If you are involved in an accident and your car is totaled out, you may find yourself with a huge difference between what you owe on the car and what your car insurance company is writing your lien holder a check for.
You can protect yourself by covering that gap between coverage and payoff by purchasing an additional GAP insurance policy. This policy is sometimes automatically included in your lease agreement. In the case of high-end cars, the lender may add this premium automatically into your lease payment.
In the case of auto loans, you may need to purchase an additional policy. Generally, these policies are not expensive and for the protection that you are given, are worth the extra investment. This insurance protection is designed to complement your cheap car insurance policy and not be a replacement for it.
If you decline the coverage that is available from a GAP insurance policy, you are setting yourself up to be sued for the difference should an accident occur and you are left with a deficient balance on your car loan. That money can be collected upon by serving you with collection notices or judgments against you.
Should you be sued for the difference, you not only put yourself in a position where you may be unable to obtain a loan in the future or have blemishes on your credit history, you look to have your insurance rates raised as well. Credit scores are an instrumental portion of the insurance industry’s way of determining your insurance rates and a bad credit score will eventually increase your insurance rates.
Protecting yourself with a GAP insurance policy on your next loan will go a long way to protecting not only your credit, but your future cheap car insurance premiums as well.
