Is Gap Insurance Worth It When Buying a Car?
Buying a new car can be an exhilarating experience. However, have you ever paused to consider that it might not be the best investment? This is due to the fact that a new car depreciates by 15% to 20% the moment you drive it off the dealership lot. This isn’t only applicable to new cars; used cars depreciate in value as well. Consequently, many people owe more on their car loans than their vehicles are worth. This can lead to significant financial implications, particularly in the event of an accident. Gap insurance could potentially be a solution to this problem.
Understanding Gap Insurance
Gap insurance covers the ‘gap’ between what your insurance company will compensate in the event of a total loss and the amount you owe on your car loan. When you purchase a car, the retail price you pay is higher than the car’s resale value. Moreover, if you’ve financed your car, you may have added extra costs into your loan that aren’t recoverable, such as sales taxes, title fees, emission fees, and registration.
Depending on the size of your down payment, you might owe more than the car is worth as soon as you drive it off the lot. This situation can be exacerbated if your car is involved in an accident, potentially leaving you with less money from your insurance company than what you still owe on your car loan.
For instance, if you purchase a vehicle for $27,000 with a $2,000 down payment, it might only be valued at $18,000 to $19,000 by insurance company estimates. Consequently, if you experience a total loss, you could still end up with a $7,000 loan balance and no car!
Do You Need Gap Insurance?
Not everyone needs gap insurance. However, it can play a significant role in your financial health under certain circumstances:
- If you purchase a car with a high depreciation rate, gap insurance could benefit you.
- If you have financed your vehicle for more than four years, gap insurance could offer you additional protection in the event of a total loss.
- If your down payment was less than 20%, you might owe more than your car’s value. In this case, gap insurance could help cover the remainder of the loan if your car is written off.
- If you lease a vehicle, you may need gap insurance (note that some manufacturers include this in their packages for brand new vehicles).
- If you drive more than the average 20,000 km per year, gap insurance could be beneficial as cars with high mileage depreciate faster.
In summary, you won’t need gap insurance if your loan-to-value ratio won’t leave you owing more than your car’s worth in the event of a total loss.
If you need assistance with securing a car loan or further advice on gap insurance, feel free to apply through our user-friendly application form at Toronto Car Loans. We ensure a prompt response and can get you approved for a car loan within 48 hours.
*Toronto Car Loans is not responsible for the accuracy of this information, and this information is for educational purposes only.