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Gap Insurance Explained
Posted by Motorama in Buyer Advice
Like most things that you absolutely need, there has been no attempt whatsoever to make insurance interesting.
While we can’t promise to make insurance exciting, we can give you everything you need to know on gap insurance.
What is it?
In a nutshell, Gap insurance covers the ‘gap’ between your insurance company payout and any balance owing on your car.
You’d be shocked at how often drivers are left footing the bill (sometimes into the thousands) when the market value paid for their car is less than their finance commitments.
How does it work?
The market value of your car (how much it’s technically worth to your insurer) is affected by depreciation (the loss of value as your car gets further away from new.) Most depreciation happens in the first few years of ownership, at different rates depending on the desirability as a used car. A luxury sports car with every bell and whistle is extremely desirable when new, but less as it gets older – a practical mid-range hatchback may not seem "desirable" in the traditional sense, but when it comes to reselling it, many more people will be clamoring for a reliable, value-for-money vehicle than an impractical two-seater with dated technology.
Here's an example: You buy a near-new, lightly used sedan for $30,000 on a five-year loan with a $3000 deposit.
So you owe $27,000 plus interest. You make repayments at $500 every month, and after 6 months your car gets stolen and wrecked. So after 6 months of making payments to your lender, that’s another $3000 off your loan – you now owe $24,000 on the primary loan, plus interest.
But after six months of driving, and using the market value immediately before your car was totalled, your car is valued at $20,000. Your insurance will pay this amount less any excess, but your lender still needs $4000 to pay out your loan – this is where gap insurance steps in.
Rather than pulling out the credit card, gap insurance will cover any difference with your insurers pay out. This applies to the life of any car loan (generally up to 7 years.)
Why do I need it?
Car insurance is something that people don’t ever want, but have out of necessity.
You may be the most careful driver in the world, but not everyone is you – if your car is taken out by a reckless driver, you’ll be even more sour if you have to take money out of your own pocket to break even on your car loan.
It’s especially useful if you are injured in an accident, and have to take time off work – giving you peace of mind that you don’t have to make frantic calls to your lender from the hospital.
Gap insurance provides added protection for your credit rating and gives you the potential to borrow less if and when you decide to purchase a replacement vehicle.
How do I get it?
Gap insurance can be added as part of your contract when purchasing a car, make sure you discuss it at the dealership.The friendly, expert Business Managers at Motorama can take you through the entire process to get your car insured, so make sure to sit down with them next time you’re at the dealership to tailor an insurance package to suit your needs.