Imagine that you finally bought the car you had dreamed of after finally getting a loan for it. Everyone notices your new car and you become the center of attention. Then on your way home, you end up colliding with another car and the worst part is that the person who hit your car has no insurance. After a month from buying your car, it has now become a big metal heap.
Why do you need to get gap insurance? Look at this example: when buying a $30,000 car and driving off with it, 20-30% of its original value drops. Why? Because it is already considered a slightly used car once it is driven out of the showroom. Now the problem would lie on your car payments since they are based on the purchasing price, but the car’s value has been reduced. An insurance company would pay the depreciated price of $21,000, but not the remaining $10,000.
However, that remaining amount has to be paid. Lenders do not particularly care about why you requested for a loan or what you plan to do with the money after applying for a loan. What matters to them is that you made a loan and you have to pay that back in full even if your car was damaged.
What gap coverage does is pay the gap between the remaining amount and actual amount. Its purpose is to clear you out from loan payments so you can start anew.
Many insurance companies offer gap insurance coverage and at times require their clients to get one as part of their contract. It is also called by another term such as “loan/lease pay off.” The good thing about this kind of insurance is that it is cheap. For a small annual fee, you can get really good coverage.
This is why it is advisable to get gap insurance after buying a new car. People may think that the chances of getting into an accident are very slim, but accidents do happen whether we like it or not. We will never know when or where it would happen, so it is best to be prepared.
If you do not avail of this particular coverage, this would cause problems in the future. Because that means you have to pay the remaining amount you had loaned from your own pocket.
This would also likely hinder you from replacing your damaged car until the loan has been completely paid.
Getting gap insurance can help in giving you a better chance of applying for another loan once your finances has been cleared and settled. Even if it may not help you buy a new car.