Beyond the basic types of auto insurance, there’s a special type of coverage you may want to consider if you’re financing or leasing your car, called differential insurance.
New cars start to lose value the moment your car rolls off the lot. If you sell your car, even after you’ve only owned it for a year, its resale value is typically up to 20% less than its original value, according to the Insurance Information Institute or Triple-I. Although the problems of the supply chain in the us. uu. are tampering with this calculation (meaning you could in some cases make a profit on a used car right now), it’s still an accurate rule of thumb.
That sudden depreciation means that if you’re financing or leasing your new vehicle, there may come a time when the amount you owe on the car is more than the market value of the car itself. For example, you may owe $9,000 on your car loan, but find that the written-down value of your car is now only $7,000. In this case, if your car is totaled, you are forced to pay more than the car is actually worth to cover your car loan.
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what about car insurance? Although your auto insurance policy will likely kick in if this were to happen, the standard insurance policy would only pay for the current value of your vehicle, meaning there is still a sum of money, a gap, that you would be required to pay. gap insurance can protect you in this situation.
For more information on car insurance, be sure to check out our list of the best car insurance companies and the best cheap car insurance companies.
what is gap insurance and when do you need it?
Sometimes called loan or lease payment insurance, gap insurance can cover the difference between the market value of your vehicle and the amount you owe in the event of an accident that totals your car.
If you’re leasing your vehicle, this coverage is typically required, according to mark friedlander, director of corporate communications for triple-i. but if you are financing your vehicle, it is voluntary. so how do you decide if you should get it?
This is a good rule of thumb:
“if you put less than 20% down on your car and you’re financing the rest, at least 80%, over four or five years or more, that’s the criteria for differential insurance,” Friedlander said. “Also, our recommendation is that you purchase gap insurance through your auto insurer rather than from the car dealer or leasing company. The latter is more expensive.”
However, buying differential insurance through your current auto insurance company can be difficult because not all companies offer differential insurance. In fact, many major national insurers like Geico, USAA, and State Farm don’t.
If you’re financing or leasing a new car, here’s a list of the top insurers that offer differential insurance coverage.
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