Why Is Gap Insurance Worth Considering As Car Prices Rise?

If you've recently looked for a car, you know how expensive they are. According to the U.S. Bureau of Labor Statistics, new vehicle costs have increased by 12.4% in the last year, while used car and truck prices have increased by 41.2%.

A large auto loan or lease might assist pay the high expenditures, but it may put you "underwater" if the vehicle is wrecked or stolen. While collision and comprehensive insurance will cover damage or theft to your vehicle, both coverage types will only pay up to the current market value of your vehicle less your deductible, leaving you responsible for the rest. This can amount to thousands of dollars in some circumstances.

Your auto dealer may recommend gap insurance, which will cover the difference so you don't have to. Gap insurance might be a wise decision in today's volatile vehicle market. However, the cost of this additional coverage varies greatly, so shop around before you buy.

Higher Automobile Prices May Result In A Wider Disparity.

The term "gap insurance" refers to assured asset protection. It pays the difference between the market value of your vehicle and the amount owed on your auto loan or lease. Because autos depreciate fast, you may owe more than the value of your vehicle, particularly during the first few years of repayment.

According to Caleb Cook, vice president of consumer lending at Massachusetts-based Digital Federal Credit Union, trends in the current vehicle market can make that disparity exceptionally big. These are some examples:

Shortages- Car manufacturers are unable to satisfy the demand for new automobiles because of a microchip scarcity caused by a pandemic. Because there are fewer new automobiles available, vendors may demand greater costs for whatever vehicle a consumer can obtain, whether new or old.

Surcharges- According to Brian Sullivan, an independent insurance broker with Avail Insurance Solutions in Oakland, California, some new-car purchasers find up paying a premium "anything from $5,000, $10,000, or even more for luxury automobiles" beyond the manufacturer's suggested retail price, or MSRP.

Long-term loans- To make high-priced automobiles more accessible, lenders are lengthening loan terms, with seven-year car loans becoming common, according to Cook. This results in lower monthly payments, but the loan debt remains greater for longer, while the car's value depreciates.

According to Cook, these characteristics increase the likelihood of being "upside down" on a car loan or lease, owing more than the automobile's worth. "People are taking out longer-term financing, larger loan amounts, paying somewhat more than MSRP or paying a premium for a secondhand automobile," he adds. "Their upside-down potential is far greater."

While used-car prices are high, shoppers may not be concerned about automobiles losing value, but this effect is likely to be fleeting. Those who paid high automobile prices would be particularly vulnerable when the auto industry inevitably corrects itself, according to Sullivan. Values may fall, expanding the disparity between what a car is worth and what is due on it.

Is It Worthwhile To Get Gap Insurance?

"Anyone who buys or leases a new automobile or truck should think about gap insurance because the vehicle's value begins to degrade the moment it leaves the dealership." In reality, most automobiles lose 20% of their value within a year," Loretta Worters, vice president of public relations at the Insurance Information Institute, said via email.

•You should think about gap insurance in particular. Worters said that if:

•You financed for at least 60 months.

•You paid a 20% or less down payment.

•You bought a car that depreciates fast.

•You rented the car. In reality, gap insurance may be required by some lease agreements.

•You don't need gap insurance if you don't have a vehicle loan or lease, or if you paid a substantial down payment.

What To Look For When Buying Gap Insurance

Gap insurance may be purchased from your insurer, your lender, or the auto dealership, but Sullivan believes it is more cost-effective to go via your insurer. "The premium might be quite low." "Typically, gap coverage might start at $19 per year," Sullivan explains.

In comparison, gap insurance purchased from a dealer or lender can cost $500 to $700 as a one-time charge.

Typically, gap insurance is only required for two or three years while you pay off your automobile loan. When your loan debt equals the real worth of your automobile, you should cancel your gap insurance coverage.

If you did not get gap insurance when you purchased your vehicle, you may be able to do so afterward. Gap insurance is available from some insurers for automobiles that are no more than two or three model years old.

Gap insurance, in Cook's opinion, is worth considering.

"This existing situation will not continue forever." "We'll work out the shortage," he adds. "In the near run, I believe the gap is more crucial now than it has ever been."