There is just something about driving home a brand-new car for the first time. Maybe it’s that new car smell: the intoxicating aroma created by plastic, glue and leather off-gassing. Or, perhaps it’s the short-lived absence of rattles and squeaks, the taught steering and suspension or the spotless upholstery. Whatever the cause, it is an experience everyone should have at least once in their life.
There is also nothing quite like brand-new car depreciation. Edmunds.com estimates that the very minute you drive that new car off the lot it instantly depreciates 9%, on average. At the end of one year, your car has lost 15-25% of its original value. By the end of 5 years, you are the proud owner of a vehicle worth about 37% of the original purchase price. Most of us know this is a fact of life, and accept it as a trade-off for enjoying the new car experience.
From an insurance perspective, however, this deprecation can be a very real problem should a brand-new car be totaled in the first 2 to 3 years of ownership. To understand the problem, let’s examine a hypothetical scenario of a $30,000 new vehicle with a 5-year loan at 6%:
|Market Value||Loan Balance||Difference|
|Day of Purchase||$27,314
|End of Year 1||$24,300
|End of Year 2||$20,579
|End of Year 3||$17,406
|End of Year 4||$14,593
|End of Year 5||$12,069
You’ll notice that the vehicle is worth substantially less than the loan balance the first year and a bit less the second year. We call this the difference the between market value and the loan balance the “GAP”. However, by the third year, the market value and the loan balance have caught up to each other. Keep in mind this table assumes fairly conservative depreciation percentages and an average loan interest rate. If your vehicle is more expensive, depreciates faster, has a higher interest rate or longer repayment terms, your “GAP” will be greater.
Buying GAP Insurance
To solve this problem, we recommend you consider purchasing “GAP” insurance. GAP, which stands for Guaranteed Asset Protection, pays for the difference between your vehicle’s fair market value and loan balance. The car dealership will typically offer to include GAP coverage in your financing, often at a cost of several hundred dollars, and for the entire duration of your automobile loan. In the event of a total loss to your vehicle, this means you’ll be dealing with two insurance companies. You are also paying for coverage you probably don’t need after the 3rd year of ownership.
As usual, at Safeguard Insurance have a better solution. We can include GAP protection on your auto insurance policy for a fraction of the cost and remove it after the second or third year at your discretion. The annual cost on your auto insurance is typically $30 to $60 per year. We also may have other options, such as new car replacement, OEM parts only and waiver of betterment that may be beneficial to you.
If you are in the market for a new vehicle, please remember to “mind the GAP” and contact us to discuss GAP coverage before you buy it from the car dealership. As always, we look forward to speaking with you!