Posted by Tom Martino at 12:40 pm 76 Comments Print
You’ve probably heard of “Gap insurance”. But do you know what it is? Do you know what it covers? If you’re like most of my callers, you think “gap insurance” will pay off your loan (if car is totaled) even if your car is worth less at the time of the accident.
Here’s why … What if you trade in a car with negative equity? That “negative” amount is added to the price of your new car. So, your car loan will be artificially high for that new car. And what if you over-pay for the new car? Again, your loan would be artificially high! The same goes for financing extended warranties and dealer add-ons and options.
The point is this: “Gap insurance” is not responsible for your inflated loan balance. The only thing they cover is the normal depreciation of that car. In other words, at the time of the accident (if car is totaled), you get to add back the amount of depreciation to get closer to your actual loan balance. It is possible you may still have to come out-of-pocket to satisfy the car loan after an accident.
The moral of this story? Avoid negative equity when buying a new car, avoid over-paying for the car and do not finance a bunch of warranties, insurance and other junk into your car loan!
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