Using a car is very common but what is not common is having enough finance to buy a car. People opt for a car loan in order to pay for the purchase. But there are risks involved like what if the car gets stolen or you may get into an accident and gets destroyed? That is where insurance comes into the scene. A lot of car companies stress having gap insurance, but most Canadians underestimate it. One thing that you must understand is that gap insurance holds a lot of importance when buying a car. Want to know how? Read this article.
What is Gap Insurance?
The gap insurance is a guarantee that you get against car purchases that are in excess of your regular coverage. In case your car or your vehicle gets stolen or if it’s destroyed, this insurance will give you protection against financial loss. In simple terms, it will cover the gap between what you are going to pay on your own and how much the actual cost would be.
You can opt for gap insurance from a vehicle dealership or a financial institution. The best part is that it would also assist you in paying off your car or auto loan if the value of the vehicle is more than the market value and you have to pay more because of that. Gap insurance can be a one-time premium thing.
Most car dealerships prefer giving cap insurance because they fear that the insurance does not cover the entire amount and thus the car owner may not be able to pay for it. You can get gap insurance for as low as $350 to $800. Though the final amount depends on your car value, loan value, and the length for which you are getting the car loan.
The Functionality of Gap Insurance
You should know that a car is not an asset but a liability because every year, its value decreases, and with time the parts warn out and you get less value when you sell it compared to what you paid to buy it.
If you are paying less in the down payment to buy a car and then you want to cover the additional amount through EMIs, after a few years, the car value would be less than what you are actually paying for it in EMIs. in addition to that, extra expenses like taxes also gets added.
For example, if buying a car which is costing you $30,000 and additional taxes of $5,000 are applied, you are going to pay $35,000. Now you are paying 10% as a down payment which comes at $3,500, the loan value would be $32,500. Also, consider that the car depreciates by 15% every year, so the depreciation amount would be $4,875. It will bring down the car value to $30,125. To buy the car as mentioned above, you have taken a loan for $32,500.
So, there is a gap of $2,375. (32,500 – 30,125).
Now, this difference is known as “upside-down” for the owner of the car. If the car gets stolen, then the insurance company would only pay what the car’s actual value is – which is $30,125. So, the difference of $2,375 would have to be paid by you or the gap insurance. Most people face this situation and it is hard for them to pay the difference when they are not prepared for it. Buying gap insurance can cost you a little bit but it will save you in case of any tragic situations.
Who Needs to Buy Gap Insurance?
There are situations in which you should consider buying gap insurance as mentioned below.
Buying a new vehicle: As soon as you buy a new vehicle or a new car, it will lose its value because you are going to use it. It will create a gap as we described in the above section. Thus, you need to buy gap insurance to cover the difference in case of an emergency.
Higher depreciation: Depreciation can reduce the value of a vehicle. Luxury cars generally attract higher depreciation rates and in those cases, you would like to buy gap insurance.
Higher interest rate: If the car loan you have purchased has a higher rate of interest then you should consider buying gap insurance because it will help you cover the difference.
Longer-term car loan: It is a new concept nowadays. If you are getting a car loan for more than 60 months then you should consider having gap insurance because in the longer term, the value of your car would be very less than what you are paying for in EMIs.
Lease: If you are going to lease a car or buy a car without any down payment or a little down payment, gap insurance is the ideal choice for you to have.
Things to Keep in Mind While Buying the Insurance
- You must keep this thing in mind when you go to buy gap insurance because these are the exclusions and would not be included in your insurance.
- You would require nominal or basic coverage in order to use your gap insurance.
- If you are into car modifications, the additional modification that you install in your car will not be covered by the gap insurance.
- In addition to that, any overdue payment, unpaid dues in addition to extended warranties and penalties are not included under the gap protection.
Does Everyone Need It?
Not everyone would require to have gap insurance as maybe there are no additional costs that come with buying the car. In many cases, they are covered by the dealership itself. For example, if you are going to pay more than 25% of the actual car value then you may not need insurance. The reason is that the gap between the car value and the car loan would be minor or zero.
Also if your car company is going to cover any losses or it is going to replace your car in case anything happens or it gets stolen within a few years, then you don’t need any gap insurance as there is no risk.