5 Top Reasons to Buy GAP Insurance for Your New Car:
Flying Blackboard Erasers
Back in school, I had a math teacher named Mr. Jansen. Maybe about 55 years old, South African with a strong accent to boot, I thought he must’ve been made out of steel. The man was solidly built, to say the least. And heaven help you if you gave a wrong answer in his class. Should the unthinkable happen and you did, rest assured Mr. Jansen would propel, with all his considerable might, the blackboard eraser at you, at the same moment, shouting, “It’s simple math, boy!” He never missed. Covered in chalk dust and nursing whatever injury you sustained from the blackboard eraser (which, I can assure you, did 0-60 mph quicker than any dragster), you learnt to be 100% right in future or you kept your mouth shut.
Simple math.
Mr. Jansen could tell you in an instant if you needed car insurance such as GAP (Guaranteed Asset Protection) Insurance for that new car you’ve just driven off the dealership lot. Just tell him the finance details (original price, total loan repayment with interest, over what term, annual depreciation rate of the car, etc.) and he’ll give you the correct answer, for sure. No chalk-covered, dangerous projectiles heading his way. As nailed on as you spending the rest of the day nursing your pride and trying to get chalk dust out of your clothes and hair. Because, when it all comes down to it, that’s what it is – simple math.
Let me explain.
What Is GAP Insurance & Do I Need It?
GAP (or Gap) Insurance is an optional insurance policy that covers the difference between a car’s loan balance and its market (or cash) value if it is totaled or stolen. You seriously need to consider taking out a policy when purchasing a new car (or even a high-value used car) where your loan repayment period is 3-5 years or more.
5 Top Reasons to Buy GAP Insurance for Your New Car
Designed as a layer of financial protection for buyers of new cars who do so through a loan, GAP Insurance is essential if the following factors apply to you:
#1. New Car Depreciation
The moment you drive your brand new car off the dealership lot, it will start to depreciate in value. The first minute of your new purchase will cost you around 10% of the purchase price. New cars lose approximately 20-30% of their value in the first year and possibly 50% by the third year (obviously, this varies model to model).
Should you suffer the misfortune of having your new auto pride and joy completely totaled or stolen, your car insurance company will give you the current market value of it based on their criteria. Known as the ACV (actual cash value), this could well be, once depreciation has been factored in, a lot less than what is currently outstanding on the car’s loan agreement. You could end up owing your lender literally thousands of $$$$s.
GAP Insurance covers this difference.
#2. Long-Term Car Loans
As previously mentioned, you should consider GAP Insurance if your car loan repayment period is 3-5 years. If it is longer, it really is a no-brainer. Loan repayment periods are being extended all the time, allowing more people to be able to purchase vehicles at a price that suits their monthly budget. However, should the car be totaled/stolen, that monthly budget is going to become increasingly stretched as you try to make up the financial difference.
GAP Insurance covers this difference.
#3. Leased Cars
The vast majority of car-leasing companies now make GAP Insurance obligatory if you lease a car from them. Why? Because your monthly payments will not cover the difference between what you owe and what the car was worth prior to a total loss.
GAP Insurance covers this difference.
#4. Lower Deposits/Down Payments
Whatever you pay down initially on your new car purchase will clearly determine the amount of the required loan to cover the rest of the cost. The smaller that is, the bigger the loan. Finance companies are now more willing to take lower down payments as it results in more clients and more profit for them. Subsequently, the gap or difference that GAP Insurance could take care off will grow.
GAP Insurance covers this difference.
#5. Rolling Your Negative Equity
You may be the kind of car driver that loves to drive the latest model of your favorite car. Therefore, purchasing new cars is a regular occurrence. Many dealerships will allow customers to roll over the negative equity from their last car to their new one. Thus, the new loan will include this. If the unthinkable happens and this new car is totaled, the gap grows considerably.
GAP Insurance covers this difference.
Mind The GAP
It is unknown whether everything in the life of our maths teacher, Mr. Jansen, came down to mathematical equations. However, your reasons for taking out GAP Insurance on that new auto purchase fits very well into that analogy – it really is a simple equation. You can even factor in the price of the policy, currently around 5-6% of your actual insurance premium. Therefore, if you fit into any of these categories – car with rapid depreciation, long-term loan period, leasing a car, low down payment or rolling negative equity – this is one mathematical equation you really need to consider doing. It may be a little more than a blackboard eraser that hits you straight in the wallet.
This article covers the 5 top reasons for this kind of policy, but there are others. What would be an important reason for you? If you wish to share your thoughts or if GAP Insurance is something you are currently considering, please feel free to leave a comment below. It would be greatly appreciated.
