When you buy a brand new car and subscribe to a comprehensive insurance plan, you might have one more step to be completely safe from significant financial loss when you total your car. Getting a car insurance pay off loan is the final step to protect you fully.
What is a Car Insurance pay-off loan?
A car insurance pay off loan is an optional but highly recommended purchase after buying a new car. The common name for this loan is gap insurance. Your car insurance pay off loan can help you finish your car loan payment if your car gets stolen or you total it, and its depreciated value is less than the amount you still owe for the car. Another name for gap insurance is lease gap coverage. You can buy gap insurance only if you own the original loan or lease a new vehicle.
The following are some key takeaways for your car insurance pay off loan.
- In most cases, if you lease or finance a car, you must buy gap insurance.
- You only have a short period to buy gap insurance after leasing or financing a new car. (usually 30 days.) You can not purchase gap insurance if your vehicle is more than one month old.
- Only the original leaseholder of a new car can buy gap insurance.
- When you buy gap insurance, you also need collision and comprehensive insurance.
How does a Car Insurance Pay Off Loan Work?
Many people who buy new cars have no idea how quickly the vehicles lose value when they take them home. Most new cars lose as much as 30.5% of their value during the first year. When you have collision and comprehensive insurance, you can use it to replace covered losses on the vehicle. These insurance packages have limits and use your car‘s actual value.
The problem is that after your car reaches about two years, its value will have lost a lot of its book value even though it is mechanically pristine. Moreover, if you total the car or it gets stolen, the insurance company will pay you thousands of dollars less than your loan balance. Your car insurance pay off loan kicks in and pays you the difference between the money you get from the insurance company and what you owe from your original loan or lease.
For instance, let’s say your car gets totaled while you still owe $10,000 on its loan. Your insurance company could reimburse you the current value of the vehicle. If its current value is $4,000, you’d be losing $6,000 unless you have gap insurance. As the name suggests, gap insurance pays you for this ‘gap.’
What doesn’t a Car Insurance Pay Off Loan Cover?
If your car gets stolen or totaled, your gap insurance protects you from taking a loss because the insurance payment failed to cover the loan you still owe. However, your car insurance pay off loan will not cover some costs, including:
- Engine failure
- Your insurance deductible
- A rental car hire fee as your car is getting repaired.
- A downpayment for another car
- Aftermarket part costs
- Medical expenses
- Security deposits
- Funeral expenses
- Balances from previous loans or leases
- Vehicles you did not initially own
- Lease penalties for excessive use
- Travel trailers
- Motor homes
Do you need a Car Insurance Pay Off Loan if you have Comprehensive Coverage?
Yes. You will still need a car insurance pay off loan, especially if you bought your car on loan or lease. Dealerships usually offer you gap insurance if you lease your vehicle from them. Within 30 days of renting or buying your new car on loan, you can apply for gap insurance from your insurance company.
Pre-conditions for Buying Gap Insurance
When buying gap insurance, the most crucial factor is how much money you still owe on your car loan and the car’s current value. The following are cases where gap insurance can save you a lot of money.
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- Your car’s downpayment is lower than 20% of the asking price
- If your car loan will last for 60 months or more
- If you bought your car on a lease
- You have negative equity from your previous car loan attached to the current car loan
- Your car depreciates more than the average rate
Gap insurance becomes unnecessary after you have had your car for some time. For instance, if the value of your vehicle is more than the amount you still owe, it might be time to drop your gap insurance. Additionally, you might want to stop your car insurance pay off loan when you sell your car because the new owner cannot use it anyway.
How much Does Gap Insurance Cost?
The Insurance Infomation Institute (III) estimates that the average gap insurance premium is $20 per year. $20 per annum is a small amount to pay for a new car because the losses you would make without it are substantial.
However, you can discontinue your gap insurance when your remaining loan is almost equal to your car’s value.
It is cheaper to buy gap insurance from an insurance company than a dealership. Most dealerships charge around $600 for gap insurance.
You can roll your car insurance pay off loan into the car loan. However, it might be more expensive since it accrues interest.
Pros and Cons of a Car Insurance Pay Off Loan
Advantages of gap insurance
- Peace of mind because you won’t lose money when you total a new car.
- Gap insurance covers expenses that other types of cover do not cater for
- You can stop paying for gap insurance to reduce spending associated with your car
Disadvantages of gap insurance
- You cannot get gap insurance unless you are the car’s first owner.
- You only have a narrow window to get gap insurance for a new car.
Buying a new car is one of the most substantial household expenses. It makes economic sense to purchase insurance cover for it. A car insurance pay off loan is a lifesaver many people do not know. However, it can save them substantial money if they get into a severe accident in a new car.