You probably know that the minute you drive your new car off the dealer's lot, a significant portion of its value is lost. If you intend to keep the car for at least a couple of years before selling it, its loss of value may not bother you.
However, if the nearby river overflowed and your new car floated away, that loss of value would bother you. You might still owe $20,000 on it—but your insurance carrier might cover it for current value and send you a check for $14,000 instead—leaving you with a $6,000 tab.
One factor in the ever-widening gap between a car's value and what you owe on it is our tendency to look for longer terms and lower payments when financing. The longer it takes to pay for the car, the longer it takes to reach the point at which you owe less than the car's depreciating value.
Other contributing factors include the finance industry's desire to accommodate new car buyers and to make more money in interest. (Many of us can recall when three-year loans were the norm—now four- and five-year loan terms are common.)
The good news is that gap insurance can help you avoid ending up with a stiff tab with your auto lender—and it's easy to get.
Car dealers are becoming more aware of the problems these widening gaps can cause, and most can now incorporate the coverage into you payment. What's more, gap insurance is cheap—according to AutoProtection.com, gap insurance usually costs between $200 and $600. And, if for some reason you're unable to buy gap insurance at the dealer, you can buy an affordable policy through your auto insurance agent.
If you decide gap insurance is a good idea for your situation, discuss this with your agent when you start looking for your new car. Ask your agent to investigate the instances in which gap coverage would not apply, and find out how payment would be made when it did. Some policies pay complete replacement value if your car is totaled, even if that value is thousands of dollars higher than when you bought the car. Others pay only the total owed on the car, while others pay only a percentage of the total owed.
If you think gap insurance is just another bill to pay, remember this essential fact: Having this insurance may make the difference between surviving the loss of a car in good condition, or taking a hit to the wallet.