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Red car

By: Lawson Walker

Driving down the highway or parking in the supermarket parking lot you may have noticed an increase in bright shiny new cars. No, it’s not just your desire for a new car that prompts you to notice that candy apple red convertible with paper tags, it is a national trend. Americans are taking advantage of low interest rates and a buyer’s market to purchase or lease new cars at a record pace.

Not only are we purchasing a record number of new cars, we are purchasing more expensive cars.  The average MSRP of cars sold in 2015 was $1,000 more expensive than in 2014. While the price tag of the average auto has increased; the down payment required to drive off the lot has remained relatively flat between 10% and 15% of the sale price. Low interest rates have also allowed consumers to stretch out their loan payments to a record number of years. The average car loan is now payable over 6 years. There is no question that the average consumer needs reliable family transportation but the trend of longer loan periods and lower down payments exposes many Americans to a new financial risk.

The Risk

Consider this example. You purchase a new car for $33,000. You put 15% down and finance the balance at 4.5% for 6 years.  When you drive off the lot you owe $28,050 payable at $445 a month for 72 months.  Something else also happens when you drive off the lot…depreciation.   In the first year your vehicle will depreciate by as much as 25%. So say that after a year you get in an accident and total your vehicle.   At the time of the accident you have an outstanding balance of $23,884 on your vehicle loan but depreciation has reduced the actual cash value of your vehicle to $21,038.  In most cases your insurance company will pay up to the limit of the actual cash value of your vehicle; in this example, $21,038.   This means you are on the hook for the remaining $2,846 of your vehicle loan and will have to make up the difference out of your pocket.  It is important to note that higher end vehicles depreciate at a faster rate and generally come with higher amounts borrowed meaning the out of pocket expense could be much greater.

How It Works

To protect consumers from out of pocket expenses; insurance companies have created Loan/Lease or Gap coverage.  Gap coverage will make up the difference between the actual cash value of your vehicle and the amount that you still owe on your loan!  Qualifying for gap coverage is fairly easy.  Most carriers require that you be the original title holder, the loan or lease is the original for the vehicle, and that you carry comprehensive and collision coverage.  The coverage is fairly inexpensive and in the grand scheme of things worth the extra $15 to $40 you would pay to the insurance company each month.  

Limitations & Exclusions

Many carriers allow loan/lease coverage to be added to your policy at any time up to 7 years from the date that you purchased your auto.  A few carriers limit loan/lease coverage addition to within 30 days of your purchase.  It is important to note some general exclusion.  Gap coverage will not cover overdue payments, carry-over balances from previous loans or leases, and/or financial penalties on a lease for excessive use.

If you are currently paying for your new vehicle or thinking of turning your day dream of a candy apple red convertible into a reality, mind the gap and consider purchasing gap coverage. Call us at 843-519-2557 to get a Florence SC gap insurance.

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