New Car? Mind the Gap (Insurance) in CA

New Car?  Mind the Gap (Insurance) in CA

When you step off the London Underground, you’re reminded to “Mind the Gap” — the space between the train car floor and the platform. If you’re not aware of the gap, you could easily misstep and injure yourself.

You don’t need to worry about that gap unless you’re in London, but there’s another type of gap that happens every day right here in the Bay Area.  It’s the gap between the value of a new car and the loan or lease commitment.

If your car is never damaged or stolen, the gap isn’t a problem. But… if you’re involved in one of the many accidents in our area, or if your new car is stolen, the gap could be very costly.

That’s because the maximum your auto insurance will pay you is the market value of your car at the time of the accident or theft. Unfortunately, that value starts dropping as soon as you buy the car. According to Edmunds.com, the average car loses 11% of its value when you drive off the dealer’s lot!

Imagine this scenario: You’ve just bought a brand new Honda Accord with exactly the options you wanted for $30,000.  Since the dealer offered 0.9% financing, you decided to make a small down payment and finance the balance.

Everything is fine until one day you go out to your car and it’s not there. You’ve become one of the many victims of auto theft in the Bay Area.

You call your insurance company, who processes your claim, and sends a check for the market value of your car to your financing company.

But wait… the payment from the insurance company is less than the outstanding loan on the car. The financing company suddenly expects you to come up with the $3,000 difference — today.

You’re stuck with a huge bill — and no car!

Thankfully, there is an inexpensive solution — gap insurance.

What is Gap Insurance?

Gap insurance, short for guaranteed auto protection insurance, pays you the difference between the insurance payment for the current market value of your car and the remaining loan balance or lease obligation.

It’s the most effective way to make sure you don’t owe the financing company money in the event of your car being totaled or stolen.

Some insurance companies offer new car replacement coverage, which will replace a low-mileage car that’s less than a year old with a new car. That’s great, but it isn’t a substitute for gap insurance, since new car replacement coverage may exclude losses by theft or fire — huge issues here in California.

How Does Gap Insurance Work?

Gap insurance is purchased when you buy or lease a vehicle. The cost is low — usually around 5% of your comprehensive and collision premium.

When you have a total loss by theft, fire, vandalism, accident, flood, or other covered event, the insurance company determines the market value of your car and pays that amount under your comprehensive or collision coverage.

Then, if the payment is below what you still owe on your auto loan or lease, gap insurance will pay the difference.

Instead of getting a large bill to pay, your insurance covers the entire loss.

Purchasing gap coverage is a smart decision, but there’s one common mistake many people make when buying it, that costs them hundreds of dollars.

The #1 Gap Insurance Mistake

When you buy or lease a new car, the dealer may offer you gap insurance. They make it easy — they can roll the cost right into your purchase agreement.

But don’t do it!

The price you pay at the dealership can be as much as four times more than you need to pay. And if you finance the premium, you’re paying interest too.

You’ll get a much better deal by adding gap insurance to your existing auto insurance policy. Plus, you’ll only deal with one company if your car is stolen or destroyed.

Dealers may get as much as 50% commission on the overpriced gap insurance they sell you. It’s no wonder they want you to buy it from them.

Savvy car buyers know to pass on the dealership’s offer and place their gap coverage with their auto insurance agent.

Do I need Gap Insurance?

Not everyone needs gap insurance. If you paid cash for your car, or made a large down payment there’s no need to buy gap coverage.

However, if one of these situations applies to you, we recommend adding gap insurance to your current auto policy:

  • Your car’s make and model doesn’t have a high resale value
  • You have a longer-term loan of 60 months or more
  • You made a small down payment when you purchased your vehicle
  • You drive your vehicle over 15,000 miles a year
  • You are leasing a vehicle (gap insurance may already be part of your lease)

And by the way, you can get gap insurance on a used car too.

Last year, over six million trade-ins were “underwater” — the owners owed more on the car than it was worth. That’s a scary statistic!

Don’t be caught unaware.  Give us a call at 650-873-1255 and we’ll be happy to answer any questions you have about gap insurance.

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