Deciphering The Differences between Negative Equity Gap and Finance Gap Insurance
When you buy a brand-new car and drive it off the lot, 10 to 30 percent of the value of that car famously disappears. This depreciation is jarring and may seem excessive, but the idea is that once a car can no longer be labeled as new, the selling price takes a dramatic hit on the market. That first mile off the lot may likely end up being the most expensive mile you drive. In addition, in those first moments of driving the car, you will likely owe more for the car through loans or leasing fees than the car is actually now worth.
If you owe more than the car is worth – this is called negative equity, and negative equity can cause you serious issues if your car gets totaled or stolen. If your car insurance policy only pays you for the value of the car – that negative equity gap creates a discrepancy in what they pay and what you owe.
For people who need a car but don’t have the finances readily available – this is where finance gap insurance comes in. Finance gap insurance covers negative equity in most situations, though there are some essential factors to consider.
Loan Terms: The down payment amount or duration of the loan on the new car will dictate the amount of negative equity you’re driving off the lot with. These loan terms will also control how much negative equity gap there is and what level of finance gap insurance is necessary.
Leased vs. Bought: Leasing a car will typically result in more of a negative equity gap, as they don’t require a down payment, the lease payments are smaller, and they only cover depreciation of the vehicle. If you’re leasing a vehicle, check the car lease carefully. They will often include finance gap insurance in the terms of the lease and the required monthly payments, but if they don’t – you should consider separate finance gap insurance coverage. Should a total loss occur – you won’t owe a penny.
Auto Insurance Policy: Similarly, your typical auto insurance plan might include coverage for the negative equity gap and supersede your need to purchase finance gap insurance. However, such inclusions are not automatic, and they may require that certain conditions be met first, such as a large enough down payment and whether the finance terms were within certain bounds, etc. Call your auto insurance provider or read the fine print first, because you might not need extra finance gap insurance coverage.
If you do need finance gap insurance – contact us at Schechner Lifson Corporation, an independent insurance agency that can offer you help in acquiring important auto insurance coverage. With experienced and caring agents, Schechner Lifson Corporation can make sure you get the right coverage at a price that may just be more affordable than you think.