Buying a new car is a big investment, but unlike your home, cars depreciate in value very quickly. In fact, your car will lose about 30 percent of its value within a year and about half of its value with three years. But it often takes four to five years to fully pay off your car, leaving many people owing thousands more on their car loan than the vehicle is actually worth. This phenomenon is known as being upside down on your loan.
What if your car is totaled in an accident before you’ve paid it off and the insurance company only offers you the actual cash value, which is the sticker price minus depreciation? This could result in you being out a lot of money, plus you’d have no car. Here’s an example of this type of situation.
Let’s say you buy a new car for $40,000 and you dutifully make payments on it each month, but you still owe $30,000 at the time when your car is sadly totaled. Your car’s depreciated value is now $25,000, which means that you will receive a settlement of $24,500 after your $500 deductible. However, you would still owe $5,500 for a car you no longer have after putting the entire settlement toward the loan.
How can you prevent a situation like this from occurring? Gap insurance was designed to protect you from upside loans by paying the balance you still owe, which helps clear you of car debt. This coverage is optional, but at around $30 per year (a premium that decreases as your car ages), it provides an immense amount of value that could save you thousands.
Do you finance your car? Did you purchase a car model that is known for high depreciation rates? Ask your independent insurance agent about gap insurance today. It can be added to your auto insurance policy at any time, giving your agent the chance to find you the best deal to protect your investment.
Get started today! Call Pan American Insurance at (915) 562-0009 for more information on El Paso auto insurance.